Holding

Denatured salt is classifiable under the specific heading 25.01 of the Central Excise Tariff Act, 1985, and the revenue failed to discharge its burden of proof to place it under the residuary heading 38.24.

Summary

H.P.L. Chemicals Ltd., a manufacturer of hydrazine, produced a by‑product called "denatured salt" and claimed it should be classified under heading 25.01 of the Central Excise Tariff Act, 1985, which carries a nil duty rate. The Deputy Commissioner classified the product under heading 38.23 (now 38.24), a residuary heading, and demanded duty. The Commissioner (Appeals) reversed the classification to 25.01, but the Customs, Excise and Gold (Control) Appellate Tribunal set aside that order and restored the 38.24 classification. The Supreme Court examined the nature of the product, the relevant tariff notes, the chemical examiner’s report (showing 53.6% sodium chloride), and market usage as "denatured salt". It held that heading 25.01 specifically covers denatured salt and residuary sodium chloride, and that the revenue failed to discharge the burden of proof required to place the product in the residuary heading. Consequently, the product must be classified under heading 25.01 with nil duty.

Issues considered

The correct tariff heading for "denatured salt" – whether it falls under specific heading 25.01 or residuary heading 38.23/38.24.
Whether the revenue bears the burden of proof to justify a classification different from that claimed by the assessee.
Whether the raw material origin affects the classification of a residuary product.

Legislation cited

Central Excise Act, 1944s. 11AB, s. 1IAC, s. 35-L
Central Excise Rules, 1944s. Rule 173Q, s. Rule 9(2)
Central Excise Tariff Act, 1985s. Chapter Heading 25.01, s. Chapter Heading 38.23

Subjects

classification of goodscentral excisetariff headingsdenatured saltburden of proofresiduary headingHSNinterpretative rules

Judgment

M/S. H.P.L. CHEMICALS LTD. A
V.

COMMISSIONER OF CENTRAL EXCISE, CHANDIGARH

APRIL 20, 2006

[ASHOK BHAN AND LOKESHWAR SINGH PANTA, JJ.] B

Central Excise Tariff Act, 1985:

Chapter Heading No. 25.01 and 38.23 (now 38.24)-Denatured salt-
Assessee manufactured Hydrazine falling under Chapter heading No. 28.25- C
During the course of manufacture of the final product assessee produced a
residuary byproduct i.e. 'Denatured Salt'-Assessee filed classification list
claiming classification of the said product under Heading No. 25. 0 I carrying
'Nil' rate of duty-Deputy Commissioner held that the said product was
correctly classifiable under Heading No. 38.23 (now 38.24) and he accordingly D
confirmed the demand of duty and directed the appellant to deposit the same
along with interest-Commissioner (Appeals) held that the said product was
classifiable under heading 25.01-But the Tribunal held that the said product
was classifiable under heading No. 38.23 (now 38.24)-Correctness of-Held:
"Denatured Salt" is unfit for human consumption and used only for industrial
applications such as by soap manufacturers-Classification of goods is a E
matter relating to chargeability and the burden of proof is squarely upon the
Revenue-In the instant case, the said burden has not been discharged by the
Revenue-Hence, "Denatured Salt" would not fall under the sub-heading
.i 38.23 (now 38.24) but would fall under the specific heading 25.01 .

Words & Phrases: F

"Denatured Salt"-Meaning of-Jn the context of Chapter Heading No.
25.01 of the Central Excise Tariff Act, 1985.

The appellant-assessee was a company engaged in the manufacture
of Hydrazine falling under Chapter heading No. 28.25 of the Central G
Excise Tariff Act, 1985. The appellant, during the course of manufacture
of the final product, produced a residuary by product i.e. 'Denatured Salt'.
The appellant filed classification list claiming classification of the said
product under Heading No. 25.01 carrying 'Nil' rate of duty. The Deputy
12s H
126 SUPREME COURT REPORTS [2006) SUPP. I S.C.R.

A Commissioner held that the said 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. However, the Commissioner (Appeals) held that the said product
was classifiable under heading 25.01 of the Tariff Act. Customs, Excise
and Gold (Control) Appellate Tribunal set aside the order passed by the
B Commissioner (Appeals) and restored that of the adjudicating authority.
Hence the appeal.

Allowing the appeal, the Court

HELD: 1. Heading 25.01 of the Central Excise Tariff Act, 1985 is a
C 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, Central Revenue Control Laboratories (CRCL),
who has found that the product comprises of 53.6% of Sodium Chloride
and "is to be taken as Sodium Chloride". Test report was obtained by the
D Central Excise authorities from their own Chemical Examiner. Even as
per the market and trade enquires 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
E market and trade enquires conducted by the Central Excise Department
the goods in question are bought and sold as "Denatured Salt".
1133-E-GJ

2.1. As. per the Harmonized Commodity Description and Coding
F System (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
G evaporation of saturated brine and other saline solutions and also covers
table salt, salt to which anti-caking agents 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 byproduct of the treatment of certain ores.1134-G, H; 135-Af

H 2.2. As per CRCL Report, apart from 53.6% Sodium Chloride,
..
__
H.P.L. CHEMICALS LTD. v. COMMR. OF CENTRAL EXCISE, CHANDIGARH. J27.
subject product also contains Sodium Chloride. It is derived d"ue to A
chemical reaction of caustic soda, chlorine gas and· urea and is unfit for
human consumption. (135-8)

3. As per the fourth category mentioned in the explanatory notes in
the· HSN, Chapter Heading 25.01 covers, inter a/ia, "residuary' Sodium
Chloride, in particular that left after chemical processing". The subject B
product fully answers the fourth category of goods· covered ·by Chapter
Heading 25.0·1 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 Hydr~zine. The Chemical Examiner of the Department has also opined C
.that the said product"is to be taken as Sodium Chloride". The explanatory
notes, lielow· Chapter Heading 25.01 ofthe HSN, make it clear that tlie
sodium chloride which is obtairied by the chemieal processing would be
cove.red liy the Chapter Heading 25:01. [135-C-E) .

· 4. It is specifically provided in,Rule 1 of the Rules for Interpretation D
of Central Excise Tariff, titles of Sections and Chapters are provided for
ease of reference only and for legal purposes classification· must ·be
determined according to the terms of the headings and relative section or
chapter notes. The Customs, Excise and Gold (Control) AppellateTribunal
has totally failed to consider the said interpretation of Rule 1.
. (135-H; '136-AI E
5. The Tribunal has further held that since the starting raw materials
were not classifiable under Chapter 25, the residue in questi-On cannot be
a product covered by Chapter 25. This finding is based on wrong
assumptions and ,reasoning. There is ·rio such· requirement in la~ that F
before
·
a product
· .;
is r:classified
' :
~oder
>..
Chapter 25 it .,iu~t be ma~ufactured
• • : • .d: it" , i_ '•',,:

out of raw materials falling under Chapter 25. It' goes against tbe
~ \ • ; r. , . ·_ • · i ,. , . • : , ·' ; •• , . ,,

explanatory notes of HSN below Heading No. 25.01. [136-B-C) ·

6. Heading N~.38.23 (which w~s subsequently renumbered as
Heading No.38,24) ls.a residuary heading which applied only to "residual G
products of chemical and allied. industries not .elsewhere specified .or
included". The Tribunal totally erred in picking up t.h~ "e~pression
"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 ·H
128 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A totally misconceived and untenable. The Tribunal has missed the words
"not elsewhere specified or included". In the present case, "Denatured
Salt" is specifically included in Chapter Heading No. 25.01. [136-F-H]

7. This apart, classification of goods is a matter relating to
chargeability and the burden of proof is squarely upon the Revenue. If
B 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
C 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
D is not denatured salt. On the other hand, after examining the chemical
composition he has opined that the subject matter is to be treated as
Sodium Chloride. [139-8-E]

Union of India v. Garware Nylons Limited, [1996] 10 SCC 413,
E Hindustan Ferodo limitedv. CCE, [1997] 2 SCC 677, ,Ws. Bharat Forge and
Press Industries (P) ltd. v. CCE, [1990] 1 SCC 532 and Dunlop India ltd.
v. Union of India, (1976[ 2 SCC 241, relied on.

Dunlop India ltd. v. Union of India, AIR (1977) SC 597, cited.

8. Looking from any angle it cannot be held that the subject product
F would fall under the sub-heading 38.23 (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. (141-D(

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1836 of2001.
G Under Sec. 35-L of the Customs, Excise & Gold (Control) Appellate
TribunaL Chennai in Final Ordt:r No. 52612000/C dated 7. 12.2000 in Appeal
No. E/2154/200-C.

S.K. Bagaria, Rupesh Kumar and Tara Chandra Sharma for the
H Appellant. ..
HP.L. CHEMICALS LTD. v. COMMR. OF CENTRAL EXCISE, CHANDIGARH [BHAN, J.J J29

,:..
Harish Chander, Mohit Choudhary and P. Parmeswaran for the A
Respondent.

The Judgment of the Court was delivered by
"
BHAN, J. These appeals pertain to the same issue. For the sake of
convenience, ihe facts are taken from Civil Appeal No. 1836 of 2001. B
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 c
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").
D
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., 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 F
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 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
G
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 H
130 SUPREME COURT REPORTS (2006) SUPP. I S.C.R.

A 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
B 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:

C (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 11 AB
of the Act.
D (c) Penalty should not be imposed under Section 1IAC, Rules 9(2)
and l 73Q of the Central Excise Rules, 1944.
(d) The appellant's product should not be classified under Chapter
Heading No.38.23 against 25.0 I as claimed by the Appellants.

Appellant in reply to the show cause notices took a number of points,
E relevant ones of which are:

I. 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
F 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
G 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
H
H PL CHEMICALS LTD. v. COMMR OF CENTRAL EXCISE, CHANDIGARH [BHAN,J.J ] 3 J

for the manufacture of Denatured Salt. A
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. B
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 C
by order in original dated 31.3.1999. By the said order the Deputy
Commissioner held that th·e 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 D
suppression or mis-statement of facts, a co.se 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 .0 I of the Tariff Act. E
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 F
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:

I. Firstly, by referring to the titles of Section V and Chapter 25 of G
the Central Excise Tariff the Tribual has held that in order to be
covered und,er 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 t}Je starting raw materials were not classifiable under
H
132 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A 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
B a chemical product would be classifiable under Chapter 38.24
which was a 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
C 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
D 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
E consumers by this name only".

This fact has been recorded in the order in original dated 3 l.3.1999
passed by the Deputy Commissioner, Central Excise, Chandigarh.

The subject product was sent for examination by the authorities to the
F 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:-
G
"being composed of Sodium Chloride, Sodium Carbonate and
other inorganic salts"

Sodium Chloride ConteQt 53.6%

Sodium Carbonate Content 19.6%
H
H.PL. CHEMICALS LTD. v. COMMR. OF CENTRAL EXCISE, CHANDIGARH [BHAN, J J 13 3

Moisture at 100° C 9.0% A
Is to be taken as "Sodium Chloride"

STATUTORY PROVISIONS:

Heading Nos. 25.01 and 38.23 of the Central Excise Tariff are reproduced B
below for reference:-
"Head- Sub- Description of Goods Rate of
ing No. Heading duty
No.

25.01 2501.00 Salt (including table salt and denatured Nil C
salt) and pure sodium chloride, whether
or not in aqueous solution or containing
added anti-caking or free flowing agents

38.23 3823.00 Prepared binders for foundry moulds 20%
or cores; chemical products and D
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 E
or included"
Heading 25.0 I 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 of53.6% Sodium Chloride and "is to be taken as Sodium Chloride". F
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 G
sold as "Denatured Salt" and are known to the local consumers by this name
only. Thus, as per the said market,and·trade
,.11,
enquiries conducted by the
Central Excise Departmetlt the goods in question are bought and sold as
"Denatured Salt".

The explanatory notes below Heading No.25.01 in the Harmonized H
134 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A 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
B render it unfit for human consumption.

The heading includes:

(A) Salt which is extracted from underground:

either by conventional mining (rock salt),
c
or by solution mining (water is injected under pressure into
a layer of salt and returns to the surface as saturated brine).

(8) Evaporated salt:

solar salt (sea salt) is obtained by evaporation of sea water
D by the sun;

refined salt is obtained by evaporation of saturated brine.

(C) Sea water, brine and other saline solutions. The heading also
covers:
E
(I) 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.

F (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."

G 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
H 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
H.P.L. CHEMICALS LTD. r. COM MR. OF CENTRAL EXCISE, CHANDIGARH [BHAN,J.] J35

agents or free-flowing agents have been added, salt which has been denatured A
by any process arid also covers residuary sodium chloride, in particular that
left after chemical processing or obtained as a by-product of the ireatment .
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 B
.
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 C
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 processLng". The subject product fully D
answers the fourth category of goods covered by Chapter Heading 25.0 I 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 E
25.0 I of the HSN make it clear that the sodium chloride which is obtained
by the chemical processing would be covered by the Chapter Heading 25.0 I.

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 F
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 I of the Rules for Interpretation of ·
Central Excise Tariff which is reproduced below:-

"I. The titles of Sections and Chapters are provided for ease of G
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 I of the Interpretative Rules, titles of H
136 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A Sections and Chapters are provided for ease of reference only and for legal
purposes classification must be 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 I.

The Tribunal has further held that since the starting raw materials were
B 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
C Heading No.25.0 I.

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
D after chemical processing e.g. (electrolysis). None is a bye-product of
a treatment of certain oreJ. The product is obtained after crystallisation.
The product is obtained as a bye-product or Residue while
manufacturing Hydraziue. Hydrazine is admittedly a chemical. Thus
the Residue in the instant case is nothing but a residue of chemical
E 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."
F
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
G 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
H "Denatured Salt" is specifically included in Chapter Heading No.25.0 I.
HP.L. CHEMICALS LTD. v. COMMR. OF CENTRAL EXCISE, CHANDIGARH [BHAN, J ] ! J 7

During the course of hearing, learned senior counsel appearing for the A·
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, B
25.03 and 25.05 cover only products which have been washed (even
with chemical substances, eliminating the impurities without changing
the structu~e of the product), crushed, ground, powdered, levigated,
sifted, screened, or concentrated by flotation, magnetic separation or
other mechanical or physical processes (except crystallization), but C
not products that have been roasted, calcined, obtained by mixing or
subjected to processing beyond that mentioned in each heading or
sub-heading."
I
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 D
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 E
HSN. Apart from this, similar chapter notes also appears in Chapter No. I 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 F
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.25.0 I, all impurities must be removed. Similarly,
it is not provided either in Chapter 25 of the Central Excise Tariff or in G
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.25.0 I as per HSN.

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 H
138 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A 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
B 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.
c
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
D shall be preferred to headings providing a more general description.
However, when two Jr 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
E 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
F 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
G 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 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
H with reference to sub-rule (a) of Rule 3, shall be classified as if they consisted
H.P.L. CHEMICALS LTD. v. COMMR OF CENTRAL EXCISE, CHANDIGARH [BHAN, J.J J39

of the material or component which gives them their essential character. In A
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 notunder Heading 38.23 which is a residuary Heading.
B
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 C
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 D
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 he 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 E
proof is on the Revenue in the matter of classification. In Union of India and
Ors. v. Garware Nylons Limited and Ors., (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 F
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 G
is for the taxing authority to lay evidence in that behalf even before
the first adjudicating authority. Especially in 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 H
140 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A 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
B 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
c 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 Limitedv. Collector of Central Excise,
D Bombay, [1997] 2 sec 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
E 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
F 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. 25.0 I, the same cannot be classified under the residuary heading at all.
G 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 Mis. Bharat Forge and
Press Industries (P) Ltd. v. Collector of Central Excise, Baroda, Gujarat,
H [I 990] I sec 532. It was observed in para 4 inter alia as under:-
H.P.L. CHEMICALS LTD. v. COMMR. OF CENTRAL EXCISE, CHANDIGARH [BHAN, J.J 141

"4. The question before us is whether the Department is right in A
claiming that the items iri 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 B
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. v. Union of India & Ors., [1976] 2 SCC
241, this Court held:-

" ..... When an article has, by all standards, a reasonable claim to be C
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." D
Looking from any angle .it cannot be held that the subject product
would fall under the sub-heading 38.23 (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.
E
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.

v.s.s. Appeal allowed.