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Hindustan Zinc Ltd. v. Commissioner Of Central Excise, Jaipur .
Factual and Procedural Background
The assessee, a wholly-owned Government of India undertaking, manufactures zinc. During the extraction of zinc from zinc-silver concentrate, a residue containing silver chloride (with 50–53% silver content) emerges in slurry form. The Department of Central Excise treated this residue as an independent, assessable commodity classifiable under Tariff Heading 28.43 and demanded duty. Adverse orders were passed by the Commissioner (Order-in-Original No. 9.CE/JP-II/1997 dated 28-29 Oct 1997) and affirmed by the Customs, Excise & Gold (Control) Appellate Tribunal (Order dated 24 Aug 1999 in Appeal No. E/223/1998-C). The assessee filed the present civil appeal under Section 35-L(b) of the Central Excise Act, 1944 before the Supreme Court.
Legal Issues Presented
- Whether the silver chloride residue generated in the assessee’s manufacturing process is “marketable” so as to qualify as “goods” for the purpose of levy of excise duty under Section 3 of the Central Excise Act, 1944.
- If marketable, whether the product falls for classification under Tariff Heading 28.43 of the Central Excise Tariff.
Arguments of the Parties
Assessee’s Arguments
- The residue is merely an intermediate process material and not excisable goods.
- Silver chloride produced in-house has only 50–53% silver content, exists in slurry form, lacks the 99% purity and 75% silver content of commercially sold silver chloride, and therefore has no market.
- The burden of proving marketability rests on the Department, which failed to establish that this slurry is capable of being bought or sold.
- Purification to bring the slurry to commercial standards would be prohibitively expensive, underscoring its non-marketability.
Department’s Arguments
- Silver chloride emerges as a distinct, white pasty mass and is therefore an assessable commodity.
- The product is classifiable under Heading 28.43 and the assessee retains it in slurry form merely for convenience of further extraction of silver.
- Market enquiry (recited in the show-cause notice) allegedly showed comparable silver chloride (75% purity) selling at Rs 10,000 per kg, from which assessable value was derived.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Moti Laminates (P) Ltd. v. CCE, (1995) 3 SCC 23 | Excise duty requires both manufacture and marketability. | Reiterated the twin tests before duty can be levied. |
| Union of India v. Delhi Cloth & General Mills Co. Ltd., (1997) 5 SCC 767 | Same twin-test principle and burden on Department. | Cited to affirm that mere tariff entry is insufficient without marketability proof. |
| Cadila Laboratories (P) Ltd. v. CCE, (2003) 4 SCC 12 | Marketability means capability of being bought/sold; Department must prove it, especially where goods are in crude form. | Relied on extensively to hold that Department failed to discharge its evidentiary burden. |
| Hindustan Zinc Ltd. v. CCE, (1990) 45 ELT 155 (CEGAT) | Described the manufacturing flow chart and recovery of silver chloride. | Used to conclude that a chemically-defined compound does emerge, satisfying the manufacture limb. |
Court's Reasoning and Analysis
Justice S. H. Kapadia reaffirmed that excisability demands a cumulative satisfaction of (i) manufacture and (ii) marketability. Applying this framework:
- Manufacture. The flow-chart evidence shows chemical transformation during flotation and installation of a silver-recovery tank. Silver chloride emerges as a chemically defined compound; hence the manufacture test is fulfilled.
- Marketability. The Court treated marketability as a question of fact and examined whether the Department adduced concrete evidence. The show-cause notice’s reference to a “market enquiry” was not supported by any material. The only data available related to commercial silver chloride with 75% silver content, unlike the assessee’s 50–53% slurry.
- Burden of Proof. Relying on Cadila Laboratories, the Court emphasized that the Department must establish that the specific goods produced by the assessee are capable of being bought or sold. No chemical analysis, sample comparison, or substantive market study was produced.
- Inference. A mere mathematical adjustment based on silver content cannot demonstrate that the slurry has a market. In the absence of credible evidence, the statutory burden remained undischarged.
- Result. Because the marketability condition failed, the product cannot be treated as excisable goods, notwithstanding correct classification under Heading 28.43.
Holding and Implications
Appeal Allowed; impugned orders set aside. The Supreme Court directed refund of approximately Rs 1.13 crores (duty plus interest) already recovered from the assessee and made no order as to costs.
Implications: The judgment reinforces that the revenue authorities must marshal concrete evidence of marketability—particularly where goods are in crude or impure form—before demanding excise duty. It underscores that failure to undertake meaningful market enquiry can defeat otherwise sustainable classification claims, but does not create a new substantive precedent beyond reiterating established principles.
S.H Kapadia, J.— The short question which arises for determination in this civil appeal filed by the assessee under Section 35-L(b) of the Central Excise Act, 1944 is 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
2. The 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.
3. 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.
4. 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 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.
5. 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 (P) Ltd. v. CCE (1995) 3 SCC 23, (1995) 76 ELT 241, Union of India v. Delhi Cloth & General Mills Co. Ltd. (1997) 5 SCC 767, (1997) 92 ELT 315 and Cadila Laboratories (P) Ltd. v. CCE (2003) 4 SCC 12, (2003) 152 ELT 262.
6. 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. CCE (1990) 45 ELT 155 (cegat), ELT at p. 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.
7. 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%.
8. In the case of Cadila Laboratories (P) Ltd. (2003) 4 SCC 12, (2003) 152 ELT 262 the Division Bench of this Court, speaking through one of us (Variava, J.) has held:(-14)
“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 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 those 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 the 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 products 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 the appellants' products and getting them chemically analysed, whether their claim is false. It has not been ascertained whether or not the appellants' products are in a 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.”
9. 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 gm 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 under the provisions of Rule 6(b)(i) of the Central Excise (Valuation) Rules, 1975 works out to be Rs 7160 per kg.”
10. 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.
11. Before concluding, we may point out that since 1990, when the case of Hindustan Zinc Ltd. (1990) 45 ELT 155 (cegat) 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 a good case on classification, we are constrained to allow the appeal of the assessee on marketability for want of evidence.
12. 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 of 1998-C and of the Commissioner dated 28-10-1997/29-10-1997 in Order-in-Original No. 9.CE/JP-II of 1997 are set aside, with no order as to costs.
13. During the pendency of the civil appeal before this Court, the Department has recovered the full duty with interest of about Rs 1.13 crores. 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.
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