Full Judgment Text
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CASE NO.:
Appeal (civil) 1836 of 2001
PETITIONER:
M/s. H.P.L. Chemicals Limited
RESPONDENT:
Commissioner of Central Excise, Chandigarh
DATE OF JUDGMENT: 20/04/2006
BENCH:
ASHOK BHAN & LOKESHWAR SINGH PANTA
JUDGMENT:
J U D G M E N T
with
C.A. Nos.7500-7501 of 2004
Bhan, J.
These appeals pertain to the same issue. For
the sake of convenience, the facts are taken from
Civil Appeal No.1836 of 2001.
The assessee-appellant (for short "the
appellant") being aggrieved by the final order
No.526/2000/C dated 7.12.2000 passed by the Central
Excise and Gold (Control) Appellate Tribunal, New
Delhi (for short "the Tribunal") in Appeal
No.E/2154/2000-C has filed the present appeal under
Section 35-L of the Central Excise Act, 1944 (for
short "the Act"). The Tribunal by the impugned
order has set aside the order of the Commissioner
(Appeals) classifying ’Denatured Salt’ under the
Chapter Heading 25.01 and held that ’Denatured
Salt’ is classifiable under the Chapter Heading
No.38.24 of the Central Excise Tariff Act, 1985
(for short "the Tariff Act").
FACTS
Appellant is a limited company incorporated
under the Companies Act, 1956 and is engaged in the
manufacture of Hydrazine falling under the Chapter
Heading No.28.25 of the Tariff Act. Appellant,
during the course of manufacture of the final
product produces residuary by-product, i.e.,
’Denatured Salt’. Appellant filed classification
list claiming classification of the said product
under the Heading No. 25.01 carrying ’Nil’ rate of
duty.
Divisional Preventive Officers of the Central
Excise visited the plant of the appellant and
observed that the raw materials used by the
appellant are Urea, Caustic Soda (Sodium Hydroxide)
and Chlorine Gas. The process of manufacture
followed by the appellant, as stated in the show
cause notice based on the report of the prevent
staff is as under: Caustic Soda and Chlorine Gas
are reacted in a closed tank and transferred to
another tank. In the said other tank Urea is
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mixed. The mixture is then heated upto 100
centigrade with the help of steam. Chemical
reaction starts in the tank and on completion of
it, Hydrazine in liquid form gets generated. It is
removed to another tank through pumps. From this
tank, the materials in limited quantities are taken
to evaporator tank where Hydrazine evaporates along
with water and passes through a condenser and is
collected. The remaining material in the
evaporator tank is taken into centrifuge. In the
centrifuge, out of the remaining materials, solids
and liquids are separated. The liquid form
centrifuge is again passed through the evaporator
tank and, in turn, through condenser to collect
Hydrazine. This process is continued for all
remaining liquids and is a continuous process for
further retrieval of Hydrazine. The residue solid
which remains in the centrifuge is taken out from
its bottom and it is in the form of white
crystalline powder and which is sold by the
appellant as Denatured Salt. It is this product
whose classification is in dispute in the present
case.
On the basis of the report submitted by the
Preventive staff, the Deputy Commissioner of
Central Excise,
Chandigarh issued two show cause notices dated
28.2.1997 and 12.3.1997 requiring the appellant to
show cause as to why :
(a) Central Excise Duty amounting to
Rs.12,21,863/- should not be recovered under
Rule 9(2) of the Central Excise Rules, 1944.
(b) Interest on the said duty be not recovered
under Section 11AB of the Act.
(c) Penalty should not be imposed under Section
11AC, Rules 9(2) and 173Q of the Central
Excise Rules, 1944.
(d) The appellant’s product should not be
classified under Chapter Heading No.38.23
against 25.01 as claimed by the Appellants.
Appellant in reply to the show cause notices
took a number of points, relevant ones of which
are:
1. That in the common parlance the product in
dispute is described as Denatured Salt.
2. That the end use of the product is also as
a replacement of the common salt.
3. That the classification of a mixture is to
be decided according to the dominance of
the constituent.
4. That Chemical Examiner report supports
that the product is a salt in denatured
form, i.e., impure and is not usable as
edible salt, because it contains sodium
carbonate which is not fit for human
consumption.
5. That only those residual products are
classifiable under Heading No.38.24 which
are not elsewhere specified or included.
6. That it is not necessary that sodium
chloride should be an input for the
manufacture of Denatured Salt.
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7. That it is not the intention of the
legislature that first salt should be
produced and thereafter it should be
denatured because the legislation was
fully aware that impure/inedible salt is
available whether natural or through some
chemical process that is why it appear on
the HSN.
8. That even six month’s period is not
available to the department for the
raising of the demand and the entire
demand is without the authority of law.
After considering the replies filed by the
appellant, the Deputy Commissioner of Central
Excise, Chandigarh decided both the said notices by
order in original dated 31.3.1999. By the said
order the Deputy Commissioner held that the subject
product was correctly classifiable under Heading
No. 38.23 (now 38.24) and he accordingly confirmed
the demand of duty and directed the appellant to
deposit the same along with the interest. It was
further held that since there was no material on
record to indicate any suppression or mis-statement
of facts, a case for imposing the penalty was not
made out. Against the order passed by the Deputy
Commissioner, the appellant filed an appeal before
the Commissioner (Appeals), Central Excise and
Customs, Chandigarh, who allowed the same by order
in appeal dated 28.3.2000 by holding that the
subject product was classifiable under Heading
25.01 of the Tariff Act.
Aggrieved by the order passed by the
Commissioner (Appeals) the Revenue filed appeal
before the Tribunal which has been accepted by the
impugned order. The Tribunal has set aside the
order passed by the Commissioner (Appeals) and
restored that of the adjudicating authority. It
has been held that the subject product was
classifiable under Heading 38.24.
The Tribunal has set aside the order of the
Commissioner (Appeals) primarily by recording the
following 4 findings:
1. Firstly, by referring to the titles of Section
V and Chapter 25 of the Central Excise Tariff
the Tribual has held that in order to be
covered under Chapter 25, the goods must be
"mineral products" and that these must be salt,
sulphur, clay and stone, plastering materials,
lime and cement.
2. That since the starting raw materials were not
classifiable under Chapter 25, the residue in
question cannot be a product covered by Chapter
25.
3. That the Denatured Salt is a residue of the
chemical industry covered by Chapter 38. It is
not elsewhere specified and provided.
4. The residue in the instance case being from
Hydrazine, which is a chemical product would be
classifiable under Chapter 38.24 which was a
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specific heading for such products.
Before adverting to the legal submissions
addressed by the learned counsels appearing for the
assessee and the Revenue, it would be relevant to
detail two important findings on fact recorded by
the authorities below.
The Central Excise Authorities conducted market
enquiry through the Assistant Commissioner of
Central Excise, Chandigarh and the said enquiry
inter alia revealed as under:-
"The enquiry revealed that instant
goods were being consumed by the local
soap manufacturers as a filler in the
detergent and as a substitute of the
common salt. As these manufacturers
of soaps had started purchasing the
goods only for a few years since the
noticee started producing and
supplying the same under the name of
’denatured salt’ in their invoices,
the goods were known to the localized
consumers by this name only".
This fact has been recorded in the order in
original dated 31.3.1999 passed by the Deputy
Commissioner, Central Excise, Chandigarh.
The subject product was sent for examination by
the authorities to the Central Examiner of Central
Revenue Control Laboratories (in short "CRCL").
The CRCL found the subject product to be composed
of Sodium Chloride, Sodium Carbonate and other
inorganic salts. It was opined by CRCL that the
subject product is to be taken as Sodium Chloride.
The report of CRCL as quoted in the order of the
Commissioner (Appeals) dated 28.3.2000 is
reproduced below:-
"being composed of Sodium
Chloride, Sodium Carbonate and other
inorganic salts"
Sodium Chloride Content -
53.6%
Sodium Carbonate Content - 19.6%
Moisture at 100o C - 9.0%
Is to be taken as "Sodium Chloride"
STATUTORY PROVISIONS:
Heading Nos. 25.01 and 38.23 of the Central
Excise Tariff are reproduced below for reference:-
"Head
-ing
No.
Sub-
Heading
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No.
Description of Goods
Rate
of
duty
25.0
1
2501.00
Salt (including table salt
and denatured salt) and
pure sodium chloride,
whether or not in aqueous
solution or containing
added anti-caking or free
flowing agents
Nil
38.2
3
3823.00
Prepared binders for
foundry moulds or cores;
chemical products and
preparations of the
chemical or allied
industries (including
those consisting of
mixtures of natural
products), not elsewhere
specified or included;
residual products of the
chemical or allied
industries, not elsewhere
specified or included"
20%
Heading 25.01 is a specific heading covering
"Denatured Salt" by name. The fact that the
product in question is a "Denatured Salt" is clear
from the test report of the Chemical Examiner,
CRCL, who has found that the product comprises of
53.6% Sodium Chloride and "is to be taken as Sodium
Chloride". This test report was obtained by the
Central Excise authorities themselves from their
own Chemical Examiner. Even as per market and
trade enquiries conducted by the Central Excise
Department itself, it was found that the said goods
are being consumed by local soap manufacturers as a
filler in the detergent and as a substitute of the
common salt; these are purchased and sold as
"Denatured Salt" and are known to the local
consumers by this name only. Thus, as per the said
market and trade enquiries conducted by the Central
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Excise Department the goods in question are bought
and sold as "Denatured Salt".
The explanatory notes below Heading No.25.01 in
the Harmonized Commodity Description and Coding
System (in short "HSN") are reproduced below:-
"This heading relates to sodium
chloride, commonly known as salt.
Salt is used for culinary purposes
(cooking salt, table salt), but it
also has many other uses and, if
necessary, may be denatured to render
it unfit for human consumption.
The heading includes:
(A) Salt which is extracted from
underground:
- either by conventional mining
(rock salt),
- or by solution mining (water
is injected under pressure
into a layer of salt and
returns to the surface as
saturated brine).
(B) Evaporated salt:
- solar salt (sea salt) is
obtained by evaporation of
sea water by the sun;
- refined salt is obtained by
evaporation of saturated
brine.
(C) Sea water, brine and other saline
solutions.
The heading also covers:
(1) Salt (e.g., table salt) which has
been slightly iodised, phosphated,
etc., or treated so that it will
remain dry.
(2) Salt to which anti-caking agents
or free-flowing agents have been
added.
(3) Salt which has been denatured by
any process.
(4) Residuary sodium chloride, in
particular that left after
chemical processing (e.g.,
electrolysis) or obtained as a by-
product of the treatment of
certain ores."
As per HSN this Heading 25.01 relates to sodium
chloride, commonly known as salt. Salt is not only
used for culinary purposes i.e., cooking salt,
table salt, but it also has many other uses and, if
necessary, may be denatured to render it unfit for
human consumption. The heading includes Salt
extracted from underground, evaporated salt, sea
water salt obtained by evaporation of sea water by
the sun, refined salt obtained by evaporation of
saturated brine and other saline solutions and also
covers table salt, salt to which anti-caking agents
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or free-flowing agents have been added, salt which
has been denatured by any process and also covers
residuary sodium chloride, in particular that left
after chemical processing or obtained as a by-
product of the treatment of certain ores.
As per CRCL Report, apart from 53.6% Sodium
Chloride, subject product also contains Sodium
Carbonate. It is derived due to chemical reaction
of caustic soda, chlorine gas and urea and is unfit
for human consumption. This position was also
clarified in the statement of the appellant’s
representative Shri Surinder Singh Chawla, who
stated that the subject product is "Sodium
Chloride" which is the technical name of the salt
and known in the market as such. That it is unfit
for human consumption and was used only for
industrial applications such as by soap
manufacturers as filler in the detergents and the
same was not used for human consumption.
As per the fourth category mentioned in the
explanatory notes in the HSN, Chapter Heading 25.01
covers, inter alia, "residuary Sodium Chloride, in
particular that left after chemical processing".
The subject product fully answers the fourth
category of goods covered by Chapter Heading 25.01
as per HSN. Even, according to the process of
manufacture described in the show cause notice, the
subject product arises as a residuary product left
after the chemical processing for the manufacture
of Hydrazine. The Chemical Examiner of the
Department has also opined that the said product
"is to be taken as Sodium Chloride". The
explanatory notes, below Chapter Heading 25.01 of
the HSN make it clear that the sodium chloride
which is obtained by the chemical processing would
be covered by the Chapter Heading 25.01.
By referring to the titles of Section V and
Chapter 25 of the Central Excise Tariff, Tribunal
has held that in order to be covered by Chapter 25
the goods must be "mineral products" and these must
be Salt, Sulphur, Clay and Stone, plastering
materials, lime and cement. This finding of the
Tribunal is totally incorrect and is contrary to
Rule 1 of the Rules for Interpretation of Central
Excise Tariff which is reproduced below:-
"1. The titles of Sections and
Chapters are provided for ease of
reference only; for legal purposes,
classification shall be determined
according to the terms of the headings
and any relative Section or Chapter
Notes and, provided such headings or
Notes do not otherwise require,
according to the provisions
hereinafter contained."
It is specifically provided in Rule 1 of the
Interpretative Rules, titles of Sections and
Chapters are provided for ease of reference only
and for legal purposes classification must be
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determined according to the terms of the headings
and relative section or Chapter notes. Tribunal
has totally failed to consider the said
interpretation of Rule 1.
The Tribunal has further held that since the
starting raw materials were not classifiable under
Chapter 25, the residue in question cannot be a
product covered by Chapter 25. This finding is
based on wrong assumptions and reasoning. There is
no such requirement in law that before a product is
classified under Chapter 25 it must be manufactured
out of raw materials falling under Chapter 25. It
goes against the explanatory notes of HSN below
Heading No.25.01.
The Tribunal has further held as under:-
"....On a study of the process of
manufacture we find that certain
chemicals are reacted, none of these
chemicals are classifiable under
chapter 25, thus the Residue in
question cannot be a product obtained
after chemical processing e.g.
(electrolysis). None is a bye-product
of a treatment of certain ores. The
product is obtained after
crystallisation. The product is
obtained as a bye-product or Residue
while manufacturing Hydrazine.
Hydrazine is admittedly a chemical.
Thus the Residue in the instant case
is nothing but a residue of chemical
and allied industries. We note that
there is specific heading for Residue
of chemical and allied industries
under the present chapter Heading
38.24. Since there is specific
heading, we need not go to decide the
issue by resorting to be Rules for
interpretation of tariff. These Rules
are attracted only when the heading is
not specific or the product is a
composite one."
The aforesaid reasoning of the Tribunal in our
view is incorrect. Heading No.38.23 (which was
subsequently renumbered as Heading No.38.24) is a
residuary heading which applied only to "residual
products of chemical and allied industries, not
elsewhere specified or included". The Tribunal
totally erred in picking up the expression "residue
of chemical and allied industries" and on that
basis holding as if the said heading is a specific
heading. It is on such wrong assumption that the
Tribunal further proceeded to hold that Rules for
Interpretation of the Tariff are irrelevant. Thus
the entire reasoning of the Tribunal is totally
misconceived and untenable. Tribunal has missed
the words "not elsewhere specified or included".
In the present case, we find that "Denatured Salt"
is specifically included in Chapter Heading
No.25.01.
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During the course of hearing, learned senior
counsel appearing for the Revenue relying on
Chapter note 2 of Chapter 25 of the Central Excise
Tariff submitted that in order to be classified as
"Denatured Salt" under Heading No.25.01, the
starting raw material must be salt and the product
must not contain any impurities. Chapter note 2 is
reproduced below:-
"2. Except where their context
otherwise requires, heading Nos.25.01,
25.03 and 25.05 cover only products
which have been washed (even with
chemical substances, eliminating the
impurities without changing the
structure of the product), crushed,
ground, powdered, levigated, sifted,
screened, or 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 or sub-
heading."
On a reading of Chapter note 2 of Chapter 25 we
find that there is no requirement or condition
anywhere either in Chapter note 2 or in any other
provision of law that the starting material must
itself be salt. The process adopted by the
appellant as mentioned in paragraph 3 of the show
cause notice is a physical process. In the said
process Hydrazine is concentrated by physical
process and the residual solids are obtained as
"Denatured Salt". These residuals are the
residuary Sodium Chloride left after chemical
processing which fully answers the fourth category
of explanatory notes in HSN. Apart from this,
similar chapter notes also appears in Chapter No.1
of Chapter 25 in HSN which clearly provides that
residuary Sodium Chloride left after chemical
processing is covered by Heading No.25.01. Chapter
note 2 does not provide anywhere that in order to
be covered by Heading No.25.01 the product must not
contain impurities. The bracketed portion in
Chapter note 2 is being totally misread by the
Revenue. The only effect of the bracketed portion
is that if the goods in question are washed, such
wash may be even with chemical substances
eliminating the impurities without changing the
structure of the product. It is not as if Chapter
note 2 provides that in order to be covered by
Heading No.25.01, all impurities must be removed.
Similarly, it is not provided either in Chapter 25
of the Central Excise Tariff or in Chapter note 2
or in HSN that in order to be covered by Heading
No.25.01, the starting material must be salt.
Residuary Sodium Chloride left after chemical
processing is clearly covered by Heading No.25.01
as per HSN.
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Even by applying Rues 2(b), 3(a) and 3(b) of
the "Rules for the Interpretation" of the Central
Excise Tariff (which are part of the Central Excise
Tariff Act, 1985) the subject product is to be
treated as Sodium Chloride as the same is unfit for
human consumption. Rules 2(b), 3(a) and 3(b) of
the Interpretative Rules is set out below:-
" 2(b) Any reference in a heading to
a material or substance shall be taken
to include a reference to mixtures or
combinations of that material or
substance with other materials or
substances. Any reference to goods of
a given material or substance shall be
taken to include a reference to goods
consisting wholly or partly of such
material or substance. The
classification of goods consisting of
more than one material or substance
shall be according to the principles
contained in rule 3.
3. When by application of sub-rule
(b) of rule 2 or for any other reason,
goods are, prima facie, classifiable
under two or more headings,
classification shall be effected as
follows:
(a) The heading which provides
the most specific description shall be
preferred to headings providing a more
general description. However, when
two or more headings each refer to
part only of the materials or
substances contained in mixed or
composite goods or to part only of the
items in a set, those headings are to
be regarded as equally specific in
relation to those goods, even if one
of them gives a more complete or
precise description of the goods.
(b) Mixtures, composite goods
consisting of different materials or
made up of different components, and
goods put up in sets, which cannot be
classified by reference to (a), shall
be classified as if they consisted of
the material or component which gives
them their essential character,
insofar as this criterion is
applicable."
Rule 2(b) provides that any reference in a
heading to a material or substance shall be taken
to include a reference to mixtures or combinations
of that material or substance with other materials
or substances. The classification of goods
consisting of more than one material or substance
shall be according to the principles contained in
Rule 3. Sub-rule 3(a) provides that heading which
provides for most specific description shall be
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preferred to headings providing a more general
description. Sub-rule 3(b) provides that
mixtures, composite goods consisting of different
materials or made of a different components, and
goods put up in sets, which cannot be classified
with reference to sub-rule (a) of Rule 3, shall be
classified as if they consisted of the material or
component which gives them their essential
character. In the present case, the goods in
question admittedly contain 53.6% Sodium Chloride
and their essential character is derived by the
Sodium Chloride, which is salt. Since in the
present case the salt is unfit for human
consumption, the same would be classifiable as
"Denatured Salt" under the specific Heading
No.25.01 and not under Heading 38.23 which is a
residuary Heading.
This apart, classification of goods is a matter
relating to chargeability and the burden of proof
is squarely upon the Revenue. If the Department
intends to classify the goods under a particular
heading or sub-heading different from that claimed
by the assessee, the Department has to adduce
proper evidence and discharge the burden of proof.
In the present case the said burden has not been
discharged at all by the Revenue. On the one hand,
from the trade and market enquiries made by the
Department, from the report of the Chemical
Examiner, CRCL and from HSN, it is quite clear that
the goods are classifiable as "Denatured Salt"
falling under Chapter Heading No. 25.01. The
Department has not shown that the subject product
is not bought or sold or is not known or is dealt
with in the market as Denatured Salt. Department’s
own Chemical Examiner after examining the chemical
composition has not said that it is not denatured
salt. On the other hand, after examining the
chemical composition has opined that the subject
matter is to be treated as Sodium Chloride.
It has been held by this Court in number of
judgments that burden of proof is on the Revenue in
the matter of classification. In Union of India
and others Vs. Garware Nylons Limited and others,
1996 (10) SCC 413, in para 15 this Court held as
under:-
"15. In our view, the conclusion
reached by the High Court is fully in
accord with the decisions of this
Court and the same is justified in
law. The burden of proof is on the
taxing authorities to show that the
particular case or item in question is
taxable in the manner claimed by them.
Mere assertion in that regard is of no
avail. It has been held by this Court
that there should be material to enter
appropriate finding in that regard and
the material may be either oral or
documentary. It is for the taxing
authority to lay evidence in that
behalf even before the first
adjudicating authority. Especially in
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a case as this, where the claim of the
assessee is borne out by the trade
enquiries received by them and also
the affidavits filed by persons
dealing with the subject-matter, a
heavy burden lay upon the Revenue to
disprove the said materials by
adducing proper evidence.
Unfortunately, no such attempt was
made. As stated, the evidence led in
this case conclusively goes to show
that Nylon Twine manufactured by the
assessee has been treated as a kind of
Nylon Yarn by the people conversant
with the trade. It is commonly
considered as Nylon Yarn. Hence, it is
to be classified under Item 18 of the
Act. The Revenue has failed to
establish the contrary. We would do
well to remember the guidelines laid
down by this Court in Dunlop India
Ltd. v. Union of India, AIR 1977 SC
597 at page 607. in such a situation,
wherein it was stated (AIR p.607 : SCC
p 254, para 35):--
"..... When an article has, by
all standards, a reasonable claim
to be classified under an
enumerated item in the Tariff
Schedule, it will be against the
very principle of classification
to deny it the parentage and
consign it to an orphanage of the
residuary clause."
Similarly, in Hindustan Ferodo Limited Vs.
Collector of Central Excise, Bombay, 1997 (2) SCC
677, it is held in para 4 as under:-
"It is not in dispute before us,
as it cannot be, that the onus of
establishing that the said rings fell
within Item 22-F lay upon the Revenue.
The Revenue led no evidence. The onus
was not discharged. Assuming
therefore, that the Tribunal was right
in rejecting the evidence that was
produced on behalf of the appellants,
the appeal should, nonetheless, have
been allowed".
It was submitted by the learned senior counsel
appearing for the Revenue that the goods were
classifiable under Heading No.38.23 (now 38.24) as
"residuary products of chemical or allied
industries not elsewhere specified or included"
which was the last item covered by Heading
No.38.23. The said Heading No.38.23 is only a
residuary heading covering residual product of
chemical or allied industries "not elsewhere
specified or included". In the present case
since the goods were covered by a specific heading,
i.e., Heading No. 25.01, the same cannot be
classified under the residuary heading at all.
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This position is clearly laid down in Rule 3(a) of
the Interpretative Rules set out above. As per the
said Interpretative Rule 3(a), the heading which
provides the most specific description shall be
preferred to the heading providing a more general
description. This position is also well settled by
a number of judgments of this Court. Reference may
made to M/s. Bharat Forge and Press Industries (P)
Ltd. Vs. Collector of Central Excise, Baroda,
Gujarat, 1990 (1) SCC 532. It was observed in para
4 inter alia as under:-
"4. The question before us is whether
the Department is right in claiming
that the items in question are
dutiable under tariff entry 68. This,
as mentioned already, is the residuary
entry and only such goods as cannot be
brought under the various specific
entries in the tariff should be
attempted to be brought under the
residuary entry. In other words,
unless the department can establish
that the goods in question can by no
conceivable process of reasoning be
brought under any of the tariff items,
resort cannot be had to the residuary
item...."
Similarly, in Dunlop India Ltd. Vs. Union of
India & Others, 1976 (2) SCC 241, this Court held:-
".....When an article has, by all
standards, a reasonable claim to be
classified under an enumerated item in
the Tariff Schedule, it will be
against the very principle of
classification to deny it the
parentage and consign it to an
orphanage of the residuary clause. The
question of competition between two
rival classifications will, however,
stand on a different footing."
Looking from any angle it cannot be held that
the subject product would fall under the sub-
heading 38.34 (now 38.24). It would fall under the
specific Heading 25.01 as has been claimed by the
assessee/appellant in the classification list filed
by it.
For the reasons stated above, these appeals are
accepted and the impugned orders are set aside with
consequential effects. Parties will bear their own
costs.