Boc India Ltd. vs Union Of India (Uoi)
2003 Latest Caselaw 1044 Bom

JUDGMENT

J.P. Devadhar, J.

1. During the process of manufacturing the marketable Nitrogen gas, whether the impure Nitrogen gas discharged into atmosphere as a safety measure can be made liable to excise duty is the question raised in this petition. The authorities below have held that since the Nitrogen gas is excisable under the Excise Tariff. The Petitioners are liable to pay the excise duty till the duty is exempted. According to the Petitioners, the Nitrogen gas with impurities released into the atmosphere a safety measure is not a marketable goods and hence is not excisable, even though the Nitrogen gas as such is an excisable item under the Excise Tariff.

2. The Petitioners carry on the business of manufacturing Liquid Oxygen, Liquid Nitrogen and Nitrogen gas. For that purpose, the Petitioners have established fractional distillation plant. According to the Petitioners, the manufacture of liquid Oxygen, Liquid Nitrogen and Nitrogen gas is obtained by the following process:

(i)       By using the fractional distillation method, Liquid Oxygen and Liquid Nitrogen, is obtained in the Air Separation Unit at a temperature of minus 194 degree centigrade;
 

(ii)      The Liquid Nitrogen so separated by the Air Separation Unit is stored in Liquid Nitrogen Tanks;
 

(iii)     Liquid Nitrogen is highly volatile because of its extremely low temperature. Therefore, a certain quantity becomes gaseous Nitrogen in the Air Separation Unit as well as in the Liquid Storage Tanks;
 

(iv)     This gaseous Nitrogen obtained as above is stored in a gas holder (storage tanks). Any gaseous Nitrogen in excess of the gas holder's capacity is automatically vented by breaking the water seal of the gas holder. This water seal is absolutely essential for safety purposes. In the absence of this water seal, an unsafe condition would develop in the main Air Separation Unit;
 

(v) From the gas holder, the Nitrogen gas is taken to a Water Lubricated Gas Compressor, and is subjected to purification through a Purge Bottle and Drier Batteries. The water lubricated compressor and purge operation through the purged bottle is essential to remove the impurities from the Gaseous Nitrogen. During purging also, some gas would be lost along with moisture;
 

(vi)     The Nitrogen Gas is then run through Drier Batteries to remove anymore moisture content;
 

(vi)     The Nitrogen gas, after purification through the aforesaid processes, is taken to the cylinder filling bench where cylinders, made from durable material are connected to the outlets for filling. Once the cylinders are filled, the main stop valve is closed and the cylinders are removed from the filling bench. During this process also there is a certain loss of gas but that is of extremely negligible quantity.
 

3. During the period from 17th June, 1985 to 11th May, 1988, the Petitioners were served with 11 show cause notices covering the period from September, 1984 to 17th January, 1988 thereby demanding an aggregate amount of Rs. 14,31,421.60 as excise duty on the Nitrogen gas which released into the atmosphere from the gas holders. The Petitioners sent reply to the said show cause notices stating therein that the Nitrogen gas released from the gas holder was not a marketable commodity and as such no excise duty was leviable. By an order, dated 1st June, 1992 the Assistant Collector of Central Excise confirmed the demand in respect of the period from September, 1984 to 30th June, 1987 and dropped the remaining show cause notices in view of the exemption Notification No. 177 of 1987 dated 30th June, 1987.

4. Being aggrieved by the aforesaid order the Petitioners filed an appeal before the Collector of Central Excise (Appeals) who by his order dated 8th February, 1993 confirmed the demand raised by the Assistant Collector of Central Excise. Thereupon the Petitioners filed an appeal before the CEGAT. However, the same was returned as not maintainable on the ground that the issue involved in the case was that of processing loss. The Petitioners thereupon filed a revision application before the Joint Secretary, Government of India and by the impugned order dated 4th August, 1993, the revision application filed by the Petitioners was dismissed by the Joint Secretary, Government of India on the ground that the nitrogen gas stored in the gas holders was a marketable commodity and the subsequent process carried out by the Petitioners was incidental to packing and that process has nothing to do with marketability. The Exemption Notification No. 177/87 which was issued subsequently was also relied upon to reject the claim of the Petitioners. Hence, this petition.

5. Mr. Shroff, learned Counsel appearing for the Petitioners submitted two fold arguments. Firstly, he submitted that the Nitrogen gas discharged from gas holders as a safety measure was not in a marketable condition and hence not excisable. Secondly, the Notification No. 177/87, dated 30-6-87 is clarificatory in nature and, therefore, has retrospective effect. Dealing with the first contention the Counsel submitted that the liquid Nitrogen is highly volatile because of its extremely low temperature. Therefore, certain quantity of liquid nitrogen becomes gaseous Nitrogen in the Air Separation Unit as well as in the liquid storage tanks. This gaseous nitrogen is stored in a gas holder (storage tanks). From the gas holders the nitrogen gas is taken to a water lubricated gas compressor and is subjected to purification through a purge bottle to remove the impurities in the nitrogen gas. The said nitrogen gas is thereafter passed through Drier Batteries to remove any moisture. The water lubricated compressor and purge operation through the purge bottle is essential to remove the impurities from the gaseous nitrogen as this nitrogen is utilised mainly by pharmaceuticals and other industries to create an inert atmosphere. After purification, the nitrogen gas is taken to the cylinder filling bench where the gas is filled in cylinders. Mr. Shroff submitted that unless the nitrogen gas is subjected to process of removal of impurities and dried and packed in compression, the nitrogen gas does not become a marketable commodity. He submitted that during the fractional distillation of air the nitrogen gas continues to get manufactured automatically. As the operation is continuous it is not possible to stop the production of nitrogen gas. Any gaseous nitrogen in excess of the gas holders capacity is automatically released by breaking the water seal of the gas holder. Accordingly, Mr. Shroff submitted that the nitrogen gas released from the gas holder is not a marketable goods and hence is not excisable.

6. As regards, the issuance of exemption Notification No. 177 of 1987 is concerned, Mr. Shroff submitted that the same was issued by the Government at the instance of the Petitioners and others who are similarly situated. He submitted that representations were made to the Central Government stating that the nitrogen gas released from the gas holders is not marketable commodity and, therefore, no excise duty should be levied on such non-marketable goods. It was submitted that although the exemption notification has been issued on 30th June, 1987 the same should be construed to have retrospective effect so as to cover the period during which the excise duty is sought to be claimed from the Petitioners.

7. In support of his contention, Mr Shroff relied upon the decision of the Apex Court in the case Cadila Laboratories Private Limited v. Commissioner of Central Excise reported in 2003 (152) E.L.T. 262 (S.C.) and submitted that since the Revenue has failed to discharge the burden of marketability, the orders impugned in the petition are liable to be quashed and set aside.

8. Mr. Desai, learned Counsel appearing on behalf of the Respondents on the other hand supported the orders passed by the authorities below. He submitted that the nitrogen gas is excisable under the Central Excise Tariff. He submitted that the nitrogen gas obtained by air distillation process is a marketable commodity and the subsequent procedure carried out by the Petitioners is only incidental to manufacture for the purpose of packing into cylinders and that the procedure adopted after the air distillation process does not improve the marketability of the goods. He submitted that once the nitrogen gas is manufactured, even if it is not actually sold does not in any way affect the excisability of the said product. Accordingly, the Counsel submitted that there is no merit in the writ petition and the same is liable to be dismissed.

9. We have heard Counsel on both sides and perused record placed before us. It is well settled principle of law that during the process of manufacture of an item even it some new product comes into existence, the same is not excisable unless it is found to be marketable. In other words, even if an item is covered under the Central Excise Tariff, unless it is established that the said procedure is marketable no excise duty can be levied. While considering the test of marketability, the Apex Court in the case of Cadila Laboratories (supra) held as follows: -

"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."

10. In the present case, the Petitioners are primarily engaged in the manufacture of liquid oxygen. In the process of obtaining liquid oxygen by air distillation process, the Petitioners also obtain liquid nitrogen and nitrogen gas. It is the case of the Petitioners that the nitrogen gas obtained during the air distillation process as well as the nitrogen gas generated from the liquid nitrogen stored in the gas holders are not marketable unless they are subjected for further process of removing the impurities. It is submitted that the nitrogen gas is used in pharmaceutical and other industries and for that purpose high degree impurity of nitrogen is essential. Although the filling of nitrogen gas in cylinder is a packing activity, the process of removing the impurities cannot be said to be incidental to manufacture. The Revenue has neither established that the nitrogen gas with impurities is capable of being sold in the market nor the Revenue has established that the process of purification is a unwarranted process and is not necessary for'the purpose of marketing the nitrogen gas. In this view of the matter, even though the nitrogen gas is a excisable commodity under the Central Excise Tariff, no excise duty can be levied upon the nitrogen gas till the same has become a marketable commodity. Therefore, the nitrogen gas with the impurities released for the gas holders being not a marketable commodity no excise duty could be levied upon the said nitrogen gas.

11. In view of our finding that the nitrogen gas released from the gas holders were not marketable and hence no excise duty is leviable, we do not propose to go into the question as to whether the exemption Notification No. 177 of 1987, dated 30th June, 1987 should he construed retrospectively or not and whether the exemption notification is clarificatory or not.

12. For all the aforesaid reasons, the orders impugned in the petition are quashed and set aside. Rule is made absolute in terms of prayer Clause (a) of the petition. Bank Guarantee furnished by the Petitioners pursuant to the interim order passed by this Court at the time of admission shall stand cancelled and the same be returned to the Petitioners within four weeks from the date of communication of this order.

13. Parties to act on ordinary copy of this order duly authenticated by the Associate of this Court.