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CASE NO.: Appeal (civil)  430 of 2000

PETITIONER: M/s Hindustan Zinc Limited               

RESPONDENT: Commissioner of Central Excise Jaipur.                                   

DATE OF JUDGMENT: 24/02/2005

BENCH: S.N. VARIAVA,Dr. AR. LAKSHMANAN & S.H. KAPADIA

JUDGMENT: J U D G M E N T

KAPADIA, J.

       The short question which arises for determination in this  civil appeal filed by the assessee under section 35L(b) of the  Central Excise Act, 1944 is \026 whether the intermediate product  produced in the manufacture of zinc in the assessee’s factory is  marketable and if it is marketable then whether the product is to  be classified under tariff heading 28.43.  

       Assessee is a fully owned Government of India  undertaking in the business of manufacturing zinc in its factory.   In the course of extraction of zinc from zinc-silver concentrate,  a mixture or a combination of zinc chloride, silver chloride,  lead and other material emerges from which, by further  treatment, sulphates of all other material are filtered out leaving  behind the residue of silver chloride.

       According to the department, silver chloride thus  produced in the factory of the assessee is an assessable  commodity liable to duty under tariff item 2843.10.  According  to the department, the said product is in the form of white paste  and that the assessee opts for the slurry form of silver chloride  as it is convenient to extract silver and separate other residues  of metals subsequent to the stage of emergence of silver  chloride.                  According to the assessee, silver chloride is the residue  of the treatment whereby sulphates of other materials are  filtered out and, therefore, silver chloride can at best be referred  to as an intermediate process not amounting to excisable goods;  that such a product has no market; that there is no company to  buy such a product; that the silver chloride sold at Rs.9600 per  kg. at the relevant time was a different product made from  silver; that silver chloride which is sold in the market is sold in  the special packing and that the content level of silver and the  purity level of the silver chloride sold in the market is different  from silver chloride produced in the factory of the assessee  which has silver content of only 50% to 53%.  According to the  assessee, the product which emerges in its factory is in the form  of slurry and not in the powder form and such a slurry has no  market and that it is not capable of being used in photography,  ceramics etc. to which silver chloride sold in the market is  capable of.  According to the assessee, it is a residue and not a  compound.  According to the assessee, silver chloride sold in

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the market has purity of 99% and its silver content is 75%.   According to the assessee, the silver content in the silver  chloride produced in its factory is only 53% and that it would  be very costly to purify such silver chloride to compete with  silver chloride sold in the market.  According to the assessee,  the burden was on the department to prove that the silver  chloride which is the residue of the treatment constituted  "goods" in terms of manufacture and marketability.

       Excise duty is levied under section 3 on goods  manufactured or produced in India.  Thus, before excise duty is  levied on an item, even if it is mentioned in the tariff, two  conditions have to be cumulatively satisfied, namely, that the  process by which an item is obtained is a process of  manufacture and that the item so obtained is commercially  marketable and bought and sold in the market or known to be  so in the market.  This legal position has been laid down by this  Court in a number of judgments including Moti Laminates Pvt.  Ltd. v. Collector of Central Excise, Ahmedabad reported in  [1995 (76) ELT 241], Union of India v. Delhi Cloth & General  Mills Co. Ltd. reported in [1997 (92) ELT 315] and Cadila  Laboratories Pvt. Ltd. v. Commissioner of Central Excise,  Vadodara reported in [2003 (152) ELT 262].

       Applying the above twin tests to the facts of this case, we  find from the flow-chart, which has two sides, namely, zinc line  and silver line, that at the stage of "Flotation", there is a  separation of sulphides of silver and zinc from zinc ferrites,  to  avoid loss of silver in jarosite waste solids.  [See: Hindustan  Zinc Ltd. v. Collector of Central Excise reported in [1990 (45)  ELT 155 at page 157]. In fact, the flow-chart indicates  installation of silver recovery tank for recovery of silver.  Further, silver chloride so obtained is essentially a chemically  defined compound classifiable under chapter heading 28.43.  In  the circumstances, the first test of "manufacture" is satisfied.

       At this stage, it, therefore, becomes necessary to see what  is the product of the assessee and what is the product in the  market.  At the outset, it may be pointed out that both the  products are silver chloride.  Both exist in the form of white  pasty mass.  However, the question which arises for  determination is on marketability.  According to the assessee,  silver chloride as a residue of the treatment of filtration, having  silver content of 50% to 53%, has no market.  According to the  assessee, silver chloride which is sold in the market emerges  from pure silver and, therefore, the content of silver in the silver  chloride, which is sold in the market, is 75% and the purity  level of 99%.         In the case of Cadila Laboratories Pvt. Ltd.(supra), the  Division Bench of this Court, speaking through one of us  [Variava, J.] has held: "9.     Thus, the law is that in order to be excisable,  not only goods must be manufactured i.e. some  new product brought into existence, but the goods  must be marketable.  By marketable it does not  mean that the goods must be actually bought and  sold in the market.  But the goods must be capable  of being bought or sold in the market.  The law  also is that goods which are in the crude or  unstable form and which require a further  processing before they can be marketed, cannot be  considered to be marketable goods merely because  they fall within the Schedule to the Excise Act.

12.     It is an admitted position that the department

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has (1) made no efforts to ascertain whether any of  the intermediate products are available in the  market; (2) even if available whether or not  products available in the market are the same as  that produced by the Appellant; (3) none of the  intermediate products manufactured by the  Appellants were got analysed by a chemical  analyser.  It is admitted that the Report of the  chemical analyser, relied on, was based only on the  write up given by the Appellant.  In his cross- examination the chemical analyser admits that  there was no facility available in his laboratory to  carry out tests to establish the identity of the  products.  He also admits that, except for 3-4  Diamino Benzophenone there was no reference  available, regarding other intermediate products, in  the technical literature available in the laboratory.

13.     At this stage, it must be mentioned that  Customs Notification relied upon does not refer to  all the products.  Reliance on such a Notification  may be relevant and may show marketability if the  goods are identical.  However, where a question is  raised that goods available in the market are  finished or refined product whereas what is  manufactured is in a crude and unrefined form, the  burden would be on the department to show that  what is available in the market is the same as the  goods manufactured.  In this case, no attempt is  made to find out whether any of these products are  bought or sold in the market and more importantly  it has not been verified, by drawing samples of  Appellants’ products and getting them chemically  analysed, whether their claim is false.  It has not  been ascertained whether or not Appellants’  products are in crude and unstable form and/or  whether these products had a shelf life of only a  few hours.  Mere fact that they are stored in tins or  cans for a short period would not ipso facto lead to  the conclusion that the products were stable.

14.     It is admitted that the Appellants had bought  one of the products from the market at one stage.   However, they have explained that what was  bought was in a purer form and the product they  manufacture does not have that purity.  It was for  the department to check this.  The department has  chosen not to do so.  The burden being on the  department it will have to be held that they have  not discharged that burden.  The order passed only  on the basis that these goods "can conceivably be  sold" cannot be sustained in the light of the law  which has been set out hereinabove."

                Thus, marketability is essentially a question of fact.  In  the show-cause notice it is stated as follows: "As per market enquiry conducted revealed that  silver chloride (75%) was being sold ex-factory @  Rs.1000/- per 100 Gms. i.e. Rs.10,000/- per Kg.   The silver chloride manufactured by M/s  Hindustan Zinc Ltd. Debari containing 53.7%  silver its assessable value of the comparable goods

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under the provisions of Rule 6(b)(i) of Central  Excise (Valuation) Rules, 1975 works out to be  Rs.7160/- per Kg."

       This seems to suggest that some market enquiry was  made.  However, it could not be shown to us what that market  enquiry was.  The above statement also shows that silver  chloride sold in the market had 75% silver content.  In the  present case, the department has made no efforts to ascertain  whether silver chloride emerging from the treatment adopted in  the assessee’s factory, having 50% to 53% silver content, had a  market.  Mathematical ratio between total quantity of silver  chloride and silver content cannot establish marketability.  The  burden was on the department to prove such marketability.  In  the circumstances, on facts, we hold that the department has  failed to prove the test of marketability.

       Before concluding, we may point out that since 1990,  when the case of Hindustan Zinc Ltd. (supra) came to be  decided, the question of excisability of silver chloride has been  cropping up and yet till this day no steps have been taken by the  department to go to the market and collect proper evidence of  marketability.  In most of the matters, we find lethargy and  reluctance on the part of the department to collect evidence on  marketability and even in cases where market enquiry is made    it is made in a perfunctory manner.  Consequently, despite the  department having good case on classification, we are  constrained to allow the appeal of the assessee on marketability  for want of evidence.

       For the aforestated reasons, the appeal stands allowed;  the impugned judgments and orders of the tribunal dated  24.8.1999 in Appeal No.E/223/98-C and of the Commissioner  dated 28/29.10.1997 in Order-in-Original No.9/CE/JP-II/97 are  set aside, with no order as to costs.  

       During the pendency of the civil appeal before this Court,  the department has recovered the full duty with interest of about  Rs.1.13 crore.  Since the appeal of the assessee stands allowed,  we hereby order the department to return the collected  amount(s) with interest, if any, in accordance with law.