2018 (6) TMI 767 - AT - Central Excise

Classification of goods - Axxanol 77C, Axxanol 33C and Axxanol 33 - It appeared that appellants produce the products namely Axxanol 33CD and Axxanol 33 by reducing concentration of Axxanol 33C using locally purchased lab ethanol; that the resultant products are classifiable under Chapter Heading 38112900 of Central Excise Tariff Act, 1985 - whether the process of diluting imported Rust Preventive Oil AXX33C in 208 litres drums, diluting the same in concentrations of 1 9, 1 24, 1 49 would fall within the ambit of Chapter Note 9 to Chapter 38 of the First Schedule of the CETA, 1985 and hence liable to payment of Central Excise duty? Held that - The manner of application of the product in respect of the concentration strength is either to spray or to dip the component required to be treated for anti-rusting, after which, the mineral spirit and ethanol evaporate leaving behind the concentrate in the strength that has been made into to protect the component. The functionality of the Axxanol product remains the same irrespective of dilution that it has undergone namely to protect the components or items treated from rust prevention - Chapter Note 9 is being needlessly stretched in this case by the department and in the impugned order in an attempt to bring the diluted Axxanol within the scope of product manufactured by the appellant. It is also to be noted that the imported Axxanol came in 208 litres drums and the diluted Axxanol also was sold in cans/drums either of 208 litres or 35 litres, depending on the requirement of the consumer. The processes carried out by the appellant in this case will not attract the mischief of Chapter Note 9 before or after 1.3.2008 - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Whether the process of diluting imported Rust Preventive Oil AXX33C amounts to manufacture and is liable for Central Excise duty.

Analysis:

Issue 1:
The appellants imported Axxanol 33C and diluted it to produce Axxanol 33CD for sale to local industries. The department alleged that this process constitutes manufacture under Chapter Note 9 of the Central Excise Tariff Act, 1985. The appellants argued that they were merely trading goods and not engaged in manufacturing. They contended that the product's nature remained the same after dilution and that they were under the bona fide belief that they were not liable for duty. The department issued a show cause notice for duty demand, interest, and penalties. The dispute revolved around whether the dilution process amounted to manufacture and if the appellants should pay Central Excise duty.

Analysis:
The tribunal examined Chapter Notes 8, 7, and 9 of Chapter 38 of the Central Excise Act, 1985. It noted that Chapter Note 8 covers specific products, while Chapter Note 9 applies to all other products of Chapter 38. The tribunal found that dilution alone, as done by the appellants, did not amount to manufacture under Chapter Note 9. It emphasized that the product's functionality remained the same after dilution, serving the purpose of rust prevention. The tribunal rejected the department's argument that the dilution process made the product marketable, as the product was used by industrial consumers and not sold at a retail level. It concluded that the processes carried out by the appellants did not fall under Chapter Note 9, both before and after the relevant amendment in 2008. Consequently, the tribunal set aside the impugned order and allowed the appeal.

This detailed analysis of the legal judgment highlights the key arguments presented by both parties, the interpretation of relevant legal provisions, and the tribunal's reasoning in reaching its decision.