ORDER
Jyoti Balasundaram, Member (J)
1. The above appeal arises out of the order of the Collector of Central Excise, Allahabad by which he has confirmed a duty demand of Rs. 61,75,832.59 P. under the proviso to Section 11A(1) of the Central Excise Act, 1944 and imposed a penalty of Rs. 5 lakhs on the appellants.
2. Briefly stated, the facts of the case are that the appellants are manufacturers of aluminium and products thereof, falling under Chapter 76 of the Schedule to the Central Excise Tariff Act, 1985. In the course of manufacture of aluminium, a by-product termed by the appellants as ‘vanadium sludge’ is obtained. Prior to the introduction of the new Tariff, this item was classified under TI 68 of the Schedule to the erstwhile Central Excise Tariff. With effect from 1-3-1986, the assessees submitted a classification list for this product under CET sub-heading 28.04 and paid duty at the rate of 15% ad valorem with effect from 1-3-1987, they submitted a classification list for this product under CET sub-heading 28.51 and paid duty at the same rate. After 1-3-1988, they submitted a classification list for the same product under Heading 26.15 and availed of the benefit of total exemption under Notification 19/88, dated 1-3-1988.
3. The Department was of the view that the assessees had deliberately changed the classification of the goods from Heading 28.51 to 26.15 by wilful mis-statement and suppression of facts in order to wrongly avail of exemption under the above mentioned notification and thereby evaded duty on clearances between 1-3-1988 to October 1990. A sample of the so-called vanadium sludge was drawn and analysed by the Chief Chemist of the Central Revenue Control Laboratory and it was found to contain mainly sodium orthovanadate, moisture and some amount of Sodium Hydroxide as an impurity associated during the process of manufacture. Sodium orthovanadate has chemical formula Na3V12 H2O and it is a separate chemically defined inorganic compound. The Chief Chemist after a visit to the appellant’s factory and observing the process of manufacture and after chemical analysis, opined that it is not a sludge (residue) covered under Chapter 26 and according to him, the product was actually sodium orthovanadate decahydrate classifiable “as salts of oxo-metallic or peroxometallic acid” falling under sub-heading 2841.90.
4. On the basis of the Chemist’s report a show cause notice was issued by the Superintendent on 25-3-1991 for recovery of duty of 8,08,772.43 P on the clearances during the period November 1990 to 25-2-1991 and a show cause notice dated 24-6-1991 was issued by the Collector of Central Excise raising a duty demand of Rs. 53,67,060.16 P for clearances during the period March 1988 to October 1990. Both the notices were adjudicated by the Collector who confirmed the demands, applying the extended period of limitation, in addition to imposing penalty. Hence this appeal.
5. We have heard Shri V. Sridharan, learned Advocate who contends inter alia that composition of the product in dispute as per test carried out in their laboratory is a mixture of many mixed salts like orthovanadate, sodium phosphate, sodium carbonate, sodium oxalate and thus cannot be identified by a single chemical formula pentoxide that the product is used for extraction of vanadium; that the bauxite ore used for extrusion of aluminium contains only 0.2% to 0.3% of vanadium pentoxide and not vanadium; that the product is vanadium sludge which emerges on recyling of spent liquid and is entirely different from sodium vanadate described in the HSN Explanatory notes and is not suitable for any of the end uses mentioned therein. He also submits that the impugned order has been passed in gross contravention of the principles of natural justice for the reason that the appellants have been denied the opportunity of cross-examination of the Chief Chemist on whose report the entire proceedings are based and such denial is unjustified and for the reason that the Adjudicating authority has relied upon the report of Dr. M.C. Chattopadhyaya, Professor of Inorganic Chemistry, Deptt. of Chemistry, Allabahad University which report was obtained after the conclusion of the personal hearing and the copy of the report was not even furnished to the appellants who came to know about it only from the impugned order and thus they had no opportunity to represent themselves with regard to this report. Lastly he contends that the demand for the period March 1988 to October 1990 is barred by limitation since right from the commencement of the manufacture of this item, the appellants have been describing it as vanadium sludge, classification lists describing the item as above, have been approved from time to time, samples of the product have been drawn in 1982 and 1990 and RT12 returns were regularly filed for clearance of vanadium sludge and even in 1986-87 when the appellants claimed classification under Chapter 28, there was an Exemption Notification 119/86 dated 1-3-1986 for goods falling under Heading 26.01 and 26.02 and therefore, the appellants did not deliberately changed the classification of the product from Chapter 28 to Chapter 26 for the purpose of wrong availment of Notification 19/88 covering the goods under Chapter 26. For the same reason, he also pleads against imposition of penalty.
6. In reply, the learned DR draws our attention to the report of the Chief Chemist (page 104-105 of the paperbook) wherein the Chief Chemist has opined that the disputed product is a separate chemically defined inorganic compound and is not a sludge or residue and that it contains permissible impurities as mentioned in HSN Explanatory notes and mat it is deliberately produced in the process of manufacture of aluminium by melting spent liquid at low temperature and subjecting the liquid to the process of crystallisation. He also draws our attention to the report of Dr. Chattopadhyaya that on analysis of the product, it was found to be a chemically defined inorganic compound falling under oxomettalic compound and is not a waste but a by-product. He contends that in the absence of any cogent reasons put forth for cross-examining the Chief Chemist, the denial of the opportunity of cross-examination is warranted. Lastly he submits that as the change in classification from Chapter 28 in 1986-87 to Chapter 27 in 1988 was when Notification 19/88 for Chapter 26 goods came to be issued, this shows the mala fide intention to evade payment of duty and therefore, the demand is covered by proviso to Section 11A of the Central Excise Act, 1944 and that penalty is also rightly imposed for contravention of the relevant Rules.
7. We have considered the rival submissions. The process of manufacture of the item described by the appellants as vanadium sludge is as under :
“In the course of production of alumina, bauxite is digested in a solution of caustic soda in autoclaves. Certain impurities like iron oxide, silicon oxide and titanium oxide are removed by allowing the solution to settle and filteration. After removal of the said impurities the resultant solution contains Alumina hydrate, caustic soda and small quantities of other chemical compounds of metal including vanadium in the dissolved state. Alumina hydrate is precipitated from the solution and the remaining solution is known as spent liquor.
The spent liquor contains caustic soda, small quantities of other chemical compounds of metals including vanadium. The caustic soda in the spent liquor can be recycled and re-used for digesting further quantity of bauxite and production of alumina. The spent liquor is subjected to the process of concentration for the removal of vanadium. The concentrated liquor is taken to a chilled tank where temperature is brought down to 25 C. At this temperature, vanadium salt gets crystalised our of the liquor. This vanadium salt contains vanadium compound predominantly in the form of sodium orthovanadate with the chemical formula Na3 V04 12 H2O. ”
8. We find that the Adjudicating authority while coming to the conclusion that the item in dispute is deliberately manufactured through the process of chilling and crystallising of spent liquor and hence cannot be called sludge, has relied upon the report of the Chief Chemist of the Central Revenue Control Laboratory, New Delhi and on the report dated 23-4-1992 of Dr. M.C. Chattopadhaya, Professor of Inorganic Chemistry in the University of Allahabad. The Chief Chemist’s report is as under :
“A sample from the Centrifuged material was drawn and analysed in the laboratory. It was found to contain mainly sodium orthovanadate, moisture and small amount of sodium hydroxide as an impurity associated during the process of manufacture. Sodium orthovanadate has chemical formula Na3 Vo412 H2O.
Sodium orthovanadate is a separate chemically defined inorganic compound. It is deliberately produced in the process by cooling the spent liquor at low temperature and subjecting the liquor to the process of crystallisation. Thus it is not sludge (residue) as contemplated under Heading 2620. It contains permissible impurities as mentioned in Explanatory Notes, page 228 of HSN where it is stipulated that the term ‘impurities’ applies exclusively to substances whose presence in the single chemical compound results solely or directly from the manufacturing process (including purification) substances may result from any of the factors involved in the process and are principally the following :-
(a) Unconverted starting materials;
(b) Impurities present in the starting materials;
(c) Reagents used in the manufacturing process (including purification)
(d) By-product
Sodium orthovanadate as produced in the factory is found to contain sodium hydroxide and traces of other sodium salts as impurity. Since caustic soda is used in the manufacturing process (purification), its presence does not disqualify the product for classification under Chapter 28.
In view of the above the product said to be vanadium sludge, is sodium orthovanadate decahydrate classifiable as salt of oxometallic or peroxometallic acid under sub-heading 2841.90 of CET.”
9. Dr. Chattopadhyaya’s report is reproduced below :-
“The sample supplied by you was analysed in the laboratory. It was found that over 70% of the material present is sodium orthovanadate with chemical formula Na3VO4 I2H2O. This is chemically 4efined inorganic compound and falls under oxometallic compound.
The manufacturing process of aluminium from bauxite leads to formation of sodium orthovanadate as by-product. In the manufacturing process after the separation of alumina from the parent liquid, the left out portion of the liquid is allowed to undergo a treatment which involves concentration by evaporation and subsequent cooling to obtain the product. For this special plant is required. Thus the sodium orthovanadate obtained by this process cannot be said as waste and is by-product. Since the manufacturing of aluminium bauxite is treated with alkali, therefore, it is natural that the by-product would contain some amount of alkali. Some impurities like iron etc. are present in trace amount.
In view of increasing use of vanadium in steel, pigments, production of H2SO4 and in paper industry, sodium orthovanadate is used in manufacturing of vanadium as the sodium orthovanadate can be easily converted into V2O5.”
10. The main thrust of the appellants is that the product in question is a mixture of mixed salts such as sodium orthovanadate and sodium phosphate, sodium carbonate and sodium oxalate, sodium fluoride and sodium aluminate and therefore, cannot be identified by a single formula or structure and hence cannot be classified under Chapter 28 which covers separate chemical elements and separate chemically defined compounds. They submitted that there is no technology by which sodium vanadate even with 95% purity can be extracted from vanadium sludge; that the disputed product is not deliberately produced but emerging on recyling of spent liquor that the item is a residue not suitable for any of the end uses mentioned in para 7 of HSN Explanatory notes at page 302 and it is different from the sodium vanadate mentioned therein and that the presence of sodium carbonate, sodium fluoride, sodium phosphate in varying proportions to the extent of approximately 28% to 30% in the product, cannot be treated as permissible impurities in the product, as set out in that HSN Explanatory notes at page 228-C that the above points would have been elicited and verified during the cross-examination of the Chief Chemist whose report forms the basis of proceedings. They submitted that the denial of opportunity of cross-examination of the Chief Chemist, which was absolutely necessary for the appellants to establish that their product is vanadium sludge and cannot be treated as sodium orthovanadate, has resulted in gross violation of principles of natural justice. They further submitted that the principles of natural justice have been violated by reliance upon the report of Dr. Chattopadhyaya since it was obtained after the personal hearing was over and copy of the report was not even communicated to the appellants who came to know about it for the first time from the impugned order thereby denying them the opportunity to make their submissions in respect thereof.
11. We see great force in the submissions of the appellants that the principles of natural justice have been violated in this case. The Department’s case is entirely based upon the report of the Chief Chemist and the report of Dr. Chattopadhyaya was also required to be made available to the appellants to enable them to make their submissions thereupon before passing of the impugned order. We also note that there are conflicting orders of the Tribunal on the classification of the product in dispute. In the case of Indian Aluminium Company v. Collector of Central Excise, Bangalore (Final Order No. 1972/96, dated 23-10-1996), the Bench has held that vanadium sludge obtained by the appellants therein, from the treatment of bauxite in the manufacture of alumina is not a separately chemically defined compound and therefore, Note l(a) of Chapter 28 would not be applicable and that the vanadium sludge is assessable under CET sub-heading 26.20 (as claimed by the appellants before us) in the present case. On the other hand, in the case of same Indian Aluminium Company Ltd., the Bench in its order reported in [1998 (24) RLT 763] (Indian Aluminium Company v. C.C.E., Patna) has held that vanadium sludge is not a residue arising in the course of manufacture of metals but is a product made with a definite aim and design and hence classifiable under CET sub-heading 2841.90. In neither of these cases is any opinion from the Revenue’s Chief Chemist available although in the 1996 order, the Department has relied upon the opinion of the Department of Metallurgical Engineering Institute of Technology, Varanasi while in the later decision, the Department has relied upon the opinion of the Head of the Department of Chemical Technology of Calcutta University. In the present appeal, the report of the Chief Chemist CRCL forms the basis for the Commissioner’s conclusion that the product is a separately chemically defined compound under Chapter 28. Hence it is all the more necessary for the Commissioner to afford the appellants the opportunity of cross-examining the Chief Chemist, and Dr. Chattopadhyaya. In the light of the above, we set aside the impugned order and remand the matter to the Adjudicating authority who shall extend to the appellants the opportunity of cross-examination of the Chief Chemist upon his report and Dr. Chattopadhyaya on his report dated 23-4-1992, and to adduce evidence in support of their contention that the product is a sludge falling for classification under Heading 26.20. It is also open to the assessees to urge the plea of time bar, which plea has been raised before us. He shall, thereafter, pass fresh orders. The appeal is thus allowed by way of remand.