Acts/Rules/Orders:Customs Act, 1962

Citing Reference: Mentioned  1

Case Note: Classification - Magnetite electrodes even without copper coating being finished components/parts/appliances which are ready to use fall under ICT 72(c)/72(3). Writ maintainable if stay not granted to exhaust alternative remedy. Facts: In 1969 the petitioner imported magnetite electrodes without Copper Plating and copper strips, claiming assessment under entry 72(c)/72(3), while the Customs held that the goods fell within the residuary entry 87 of the Customs Tariff. Clearance was allowed on payment of duty under item 72(c)/72(3) on execution of a bank guarantee for the differential duty. A miscellaneous petition was filed. In 1970, when a similar consignment was imported, the Customs charged duty under the residuary item 87, and a second miscellaneous petition was filed. Both the petitions were allowed by remand. Subsequent imports were, however, allowed by the Customs as in the case of first import, but show cause notices were issued. The petitioner arranged a demonstration at the factory where it was demonstrated that the uncoated copper electrodes could as well be used for the passage of the electric current as coated ones. In view of the demonstration, one SCN was withdrawn. However, later the petitioner was informed by the Collector to appear for a hearing and to produce documents. The Collector classified the goods under the residuary item 87 and ordered recovery of differential duty in terms of the bonds executed by the petitioner. Held: Classification--magnetite electrodes without copper coating are finished components/parts/appliances, ready for use, and therefore, fall under entry 72(c)/72(3). "Coating the electrodes with a thin copper coating so as to improve the distribution of the electric current over the surface of the electrodes cannot he confused with holding that without the copper coating the electrodes could not be readily fitted or that no industrial establishment would use the electrodes without giving them a copper coating. Equally fallacious is the Collr.'s reasoning that without the copper coating the electrodes cannot he considered as fully finished for use and hence cannot be treated as finished pans or finished appliances. Apart from the fact that neither entry 72(c) nor 72(3) speaks of finished parts or finished appliances, what cannot be lost sight of is that the electrodes as imported by the petitioner without the copper coating were fully finished for use inasmuch as they could be utilised in that condition as demonstrated to the Assistant Collector and Appraiser by the petitioner at its factory demonstration. Merely because by reason of the copper plating some improvement by way of improved distribution of electric current resulted, was no ground for holding that the electrodes as imported by the petitioner were not fully finished for use. ...what cannot be ignored is that a component does not cease to be a component merely because some process is carried out on it before it can be used."2. Alternative remedy--Since the petitioners were not granted stay to enable them to exhaust its remedy under the Act, Writ is maintainable; bank guarantees discharged. "......by reason of the Collector not even caring to send a reply to the petitioner's letter dated 12th April, 1976, asking for a stay of enforcement of the guarantees as the petitioner desired to exhaust its remedies under the Act, that left the petitioner with no alternative but to file the present petition and obtain the requisite interim relief. ...In the result, the petition is allowed......The bank guarantees given by the petitioner shall stand discharged."Cases Referred: State of Gujarat v. Golden Metal Industries [1975(35) STC 349]

Disposition: In Favour of Assessee

ORDER

B. Lentin, J.

1. The petitioner seeks an appropriate writ to set aside the order dated 9th March, 1976 passed by the Collector of Customs, viz., the 2nd respondent. The 1st respondent is the Union of India.

2. The petitioner is a public limited company carrying on business of manufacturing matches. The petitioner also manufactures sodium chlorate and potassium chlorate at its factory at Ambernath. The sodium chlorate manufactured by the petitioner by the petitioner is intended mainly for the bleaching of pulp and oxidation in the manufacture of dyestuff, etc. The potassium chlorate manufactured by the petitioners is an important constituent of match heads and is used by the petitioner for coating its match-sticks. Sodium and potassium chlorates are manufactured by the petitioner by a process known as "electrolysis" which involves inter alia the passing of direct electric current through a tank containing sodium chloride becomes sodium chlorate and potassium chloride becomes potassium chloride. This process is done in a tank known as "electrolytic cell", in which the electric current is passed through electrodes. The electrodes which are at positive potential are known as "anodes", and electrodes which are at negative potential are known as "cathodes". Several types and designs of such cells are ordinarily employed for such electrolysis and different varieties of materials are used for the purpose of anodes and cathodes. Anodes can be of graphite, magnetite, platinum or its alloys, etc. In the electrolytic cells used by the petitioner at its Ambernath plant, the petitioner employs magnetite anodes. Magnetite is a special kind of iron oxide consisting of ferric iron and ferrous iron in the ration of 1.9 to 2. Such magnetite is superior to graphite as it lasts longer and enables a higher temperature of electrolysis to be maintained.

3. After iron oxide of a specific composition is smelted in an electric are furnace, the same becomes magnetite. This latter being dependent inter alia on the shape and design of the particular electrolytic cell for which it is to be used and particularly on the shape of the cathodes in question. The anodes are hollow rod-like articles closed at one end and open at the other. They do not have a constant cross-section and are given 4 specific shape and size in order to enable them to be used as anodes in the particular electrolytic plant. Magnetite electrode is used like all other electrodes for the passage of electric current into the solution in question. However, according to the petitioner, in order to ensure better distribution of electric current it is customary to coal a portion of the same with a very thin layer of copper by a process of electrode positing and it is also desirable to place a copper strip in order to ensure a better contact between the source of the electric current and the copper plated surface. Further, according to the petitioner, the copper coating is not indispensable to the functioning of the electrodes and the electrodes can perform equally well even without the copper coating which merely improve the distribution of the electric current over the surface of the electrodes. Thus, according to the petitioner, the essential nature and character of the electrodes remain the same even after the copper coating.

4. Prior to 1967 the petitioner imported from Sweden magnetite electrodes which were cast in dimensions suitable for use in the electrolytic cells of the petitioner's factory. These magnetite electrodes had copper plating and the fixing of the copper strip was done in Sweden. In 1967 the petitioner started importing magnetite electrodes without the copper plating and the copper strips. In September 1969, the petitioner imported 363 cases of such magnetite electrodes from Sweden of the total assessable value of Rs. 2,96,927. The Customs Authorities took up the contentions that these goods fell within the residuary entry 87 of the Indian Customs and Central Excise Tariff. This contention was refuted by the petitioner by its letters dated 7th and 13th October, 1969. According to the petitioner, duty on these goods was assessable not under the residuary entry 87 but under entry 72(c) or 72(3). However, on 27th October 1969, the Customs Authorities allowed clearance to the petitioner on the letter paying a sum of Rs. 1,09,154.92 and executing, the requisite bank guarantee for the difference of Rs. 1,1,29,002/- arising from the fact that under entry 87 the duty was 60% whereas under entry 272(c) or 72(3) the duty was 27%. On 9th February 1970, the petitioner filed Miscellaneous petition No. 121 of 1970, in this Court challenging the decision of the Customs Authorities levying duty on this consignment under the residuary entry 87%.

5. In March, 1970, the petitioner imported another consignment of 434 cases of the same substance. This consignment was also assessed by the Customs Authorities to duty under the residuary entry 87. Thereupon on 9th April, 1970, the petitioner filed Miscellaneous Petition No. 256 of 1970 challenging this assessment made by the Customs Authorities under entry 87.

6. On 11th April, 1975 both the Miscellaneous Petitions Nos. 12, of 1970 and 256 of 1970 came up for hearing. On that day both the petitions were allowed and the impugned orders were set aside on the ground that no reason had been given.

7. Thereafter ten other consignment of the same substance were imported by the petitioner and were allowed to be cleared on the petitioner giving the requisite bank guarantee for the difference of assessable duty.

8. On 23rd September, 1975, a show cause notice was issued by the Assistant Collector of Customs, in respect of these 12 consignments wherein it was stated that they are deemed to be classifiable under the residuary entry 87 attracting duty at 60% ad valorem as against the petitioner's claim for assessment under entry 72(4)/72(c) attracting duty at 27% ad valorem for the following reasons :

"The goods in question, viz., magnetic electrodes without copper coating are deemed not fully finished articles in ready for use condition since they require copper coating inside prior to their use as electrodes in the electrolysis as component parts."

To this show cause notice the petitioner gave its reply by its letter dated 1st November, 1975 addressed to the Assistant Collector of Customs. On 11th December, 1975, a personal hearing was given to the petitioner by the Assistant Collector of Customs.

9. On 30th December, 1975 a demonstration was arranged by the petitioner at its factory whereat were present the said Assistant Collector of Customs, K. K. Kalra, and the Customs Appraiser, M. V. S. Sastri. At this factory demonstration, the petitioner showed that electrodes without copper coating could perform as well as these with copper coating and the petitioner satisfactorily answered all questions asked by the Assistant Collector, K. K. Kalra and the Appraiser Shastri at the time or this demonstration and the said Assistant Collector and Appraiser appeared to be satisfied with this factory demonstration. These aspects have in terms been stated in the forefront in paragraph 22 of the petition and have not even been remotely controverted in the affidavit-in-reply wherein, on the contrary, in para 14, these facts have been admitted as being substantially correct.

10. Thereafter, as a result of this demonstration, the Assistant Collector by his communication dated 9th January, 1970, withdrew one notice which had been issued against the petitioner.

11. However, on 2nd February, 1976 the 2nd respondent, namely the Collector of Customs, addressed a letter to the petitioner stating that he would give a hearing to the petitioner on 13th February, 1976 and called upon the petitioner to produce the necessary documents. In reply by its letter dated 11th February, 1976 addressed to the 2nd respondent the petitioner referred to the earlier demonstration given to the Assistant Collector and the Appraiser on 30th December, 1975 and the subsequent withdrawal of one notice by the Assistant Collector and requested for a clarification as the matter had been pending for a long time. On 13th February, 1976, the petitioner attended the personal hearing before the 2nd respondent, who by his impugned order dated 9th/30th March, 1976 classified the petitioner's goods as assessable to duty under the residuary entry 87 and ordered that the differential amount of duty be recovered forthwith in terms of the bond executed by the petitioner.

12. As the petitioner desired to appeal against that order, it addressed a letter, dated 12th April, 1976, to the Collector of Customs viz., the 2nd respondent, resulting for a stay of the enforcement of the guarantee given by the petitioner until the matter was finally decided by the highest authorities under the Customs Act, 1962. No reply was vouchsafed to this letter. Hence the present petition.

13. The only controversy between the parties is whether entry 72 (C)/72 (3) is applicable to the petitioner's goods as claimed by the petitioner or whether the residuary entry 87 is applicable as contended by the respondents.

14. It was urged by Mr. Setalvad, the learned counsel and appearing on behalf of the petitioner, that in passing the impugned order the Collector took into account considerations which are irrelevant and extraneous.

15. In his impugned order, the Collector has stated that the point for consideration is whether without the copper costing the petitioner's goods could be treated either as component parts or appliances. He has come to the conclusion that electrodes are merely used as consumable material in the electrolysis process and these are not in the form in which these can readily be fitted in the machine which cannot otherwise function. The second question which he has posed himself is whether these could be treated as appliances qualifying for classification under entry 72 (c) as being required for use in an industrial system. However, the sue of these articles in an industrial system is not disputed and has been conceded by the Collector himself. However, be posed himself another question, viz., "whether such use without additional coating would be proper ?" He has proceeded to answer that question by holding that the because the use of the articles after copper coating gives maximum efficiency it cannot be accepted that any industrial establishment would use the articles without the copper coating. He has further held that the import of magnetite electrodes without the copper coating would have to be considered as import of articles which were not fully finished for sue and hence cannot be treated as finished parts or finished appliances. On these considerations he has come to the conclusion that the articles are semi-finished articles and as these are nether articles of iron nor steel nor of any alloying material nor compound parts of appliances, residuary entry 87 would be attracted.

16. At this stage it would be appropriate to advert to entries 72(c), 72 (3) and 87. Entry 72 (c) reads as under : -

"72 (c) Apparatus and appliances, not to be operated by manual or animal labour, which are designed for use in an industrial system as parts indispensable for its operation and have been given for that purpose some special shape or quality which would not be essential for their use for any other purpose."

Entry 72(3) reads as under : -

"Component part of machinery as defined in item Nos. 72, 72 (1) and 72 (2) and not otherwise specified, namely, such parts only as are essential for working of the machine or apparatus and have been given for that purpose some special shape or quality which would not be essential for their use for any other purpose."

The residuary entry 87 reads as under : -

"87. All other articles not otherwise specified."

17. It is difficult to agree with the premise of the Collector that the electrodes imported by the petitioner are not in the form in which they can be readily fitted or with his generalisation that no industrial establishment would use the electrodes without the copper coating . At the demonstration given by the petitioner it was shown to the Assistant Collector, K. K. Kalra and the Appraiser M. V. S. Shastri that not only could these electrodes be readily fitted but also that the copper coating was not indispensable to the electrodes, which were demonstrated to function equally well even without the copper coating. Coating the electrodes with a thin copper coating so as to improve the distribution of the electric current over the surface of the electrodes cannot be confused with holding that without the copper coating the electrodes could not be readily fitted or that no industrial establishment would use the electrodes without giving them a copper coating. Equally fallacious is the Collector's reasoning that without the copper coating the electrodes cannot be considered as fully finished for use and hence cannot be treated as finished parts or finished appliances. Apart from the fact that neither entry 72(c) nor 72(3) speaks of finished parts or finished appliances, what cannot be lost sight of is that the electrodes as imported by the petitioner without the copper coating were fully finished for use inasmuch as they could be utilised in that condition as demonstrated to the Assistant Collector and Appraiser by the petitioner at its factory demonstration. Merely because by reason of the copper plating some improvement by ways of improved distribution of electric current resulted, was no ground for holding that the electrodes as imported by the petitioner were not fully finished for use. Even assuming for the sake of argument that the imported electrodes could be used only after lining them with a copper coating (which is not so in this case), what cannot be ignored is that a component does not cease to be a component merely because some process is carried out on it before it can be used. So it has been held by the Division Bench of the Gujarat High Court in State of Gujarat v. Golden Metal Industries (1975) 35 STC 349.

18. In support of the impugned order, the only ground urged on merits by Mr. Mehta, the learned Counsel appearing on behalf of the respondents, was that without copper coating the electrodes imported by the petitioner could not be used and hence became assessable to duty under the residuary entry 87. This contention is clearly fallacious and does not take into account the fact that the petitioner had demonstrated to the satisfaction of the Assistant Collector, K. K. Kalra, and the Appraiser, M. V. S. Shastri, that electrodes without copper coating could perform as efficiently as those with copper coating. As stated earlier, this has not only been denied, but has been admitted in the affidavit-in-reply. This brings to the forefront that the articles as imported by the petitioner could be utilised by the petitioner without the copper coating and copper strip as successfully as they could be utilised with the copper coating and the copper strip and that the copper coating and copper strip are not indispensable to the functioning of the electrodes with the result that the essential nature and character of the electrodes remain the same irrespective of the copper coating and copper strip. It is futile for Mr. Mehta to urge that the demonstration given by the petitioner in its factory was unauthorised or that the demonstration should have been given not to the Assistant Collector but to the Collector himself. Significantly, no such grievance has been made at any time in the past nor does it find a place anywhere in the affidavit-in-reply and at best in an ipse dixit assailed across the Bar, for what it is worth, which is nothing.

19. The Collector has denied to the petitioner the benefit of entry 72(3) on the ground that electrodes are consumable material. I suppose that way all material is consumable some time or the other and and at some stage or the other. Mr. Setalvad is, however, correct when he says that this finding, such as it is in violation of the principles of natural justice inasmuch as this aspect of the matter had neither been alluded to in the show-cause notice no was any opportunity given to the petitioner to meet the same.

20. None of the factors taken into consideration in the impugned order are germane to entry 72(c) or 72(3). The salient features of entry 72(c) are : (a) that the petitioner's goods must be apparatus and appliances (which indisputably they are); (b) that they must not be operated by manual or animal labour (which indisputably they are not) ; (c) that they are designed to be used in an industrial system as parts indispensable for its operation (which indisputably they are) ; (d) that they have been given for that purpose some special shape or quality (which is not disputed); and (e) and which shape or quality would not be essential for their use for any other purpose (which is also not disputed).

21. The salient features of entry 72(3) are that the petitioner's goods must be (a) component parts (which indisputably they are); (b) that they are essential for the working of the machine or apparatus (which indisputably they are); (c) that they have been given some special shape or quality for that particular purpose (which indisputably they have been given); and (d) that such special shape or quality would not be essential if they were to be used for any other purpose (which also is not disputed).

Thus Mr. Setalvad is correct when he says that the impugned order is based on irrelevant and extraneous considerations and must be set aside.

22. Mr. Setalvad urged mala fides on the part of the Collector in passing the impugned order on the ground that the Collector took over the hearing from the Assistant Collector because the latter had accepted the petitioner's explanation and had withdrawn one notice. While it cannot be disputed that it was within the competence of the Collector to take over the hearing from the Assistant Collector if he chose to, it is unnecessary to enter into the controversy of mala fides in view of the fact that on the other submissions or Mr. Setalvad, I find in his favour.

23. Mr. Mehta invited me to dismiss the petition on the ground that disputed questions of fact arise, namely, whether or not the copper coating to the electrodes increased the efficiency of performance or whether or not electrodes are component parts or are merely used as consumable material in electrolysis process. There is no merit in this contention. It does not take into account the demonstration given by the petitioner to the satisfaction of the Assistant Collector and the Appraiser one notice was actually withdrawn by the Assistant Collector. Mr. Mehta's contention also does not take into account the fact that the question of the electrodes being "consumable" material was not even the subject-matter of the show cause notice and was introduced for the first time in the impugned order without giving the petitioner any opportunity to meet the same.

24. Mr. Mehta urged that the petitioner had not exhausted all the remedies available under the Act and on that ground invited me to dismiss the petition. This contention of Mr. Mehta is also without substance, and ignores the fact that it was by reason of the Collector not even caring to send a reply to the petitioner's letter dated 12th April, 1976 asking for a stay of enforcement of the guarantees as the petitioner desired to exhaust its remedies under the Act, that left the petitioner with no alternative but to file the present petition and obtain the requisite interim relief.

25. In the result, the petition is allowed in terms of prayer (a) The Bank guarantees given by the petitioner shall stand discharged. This is a fit case where the respondents should pay to the petitioner the costs of the petition. The respondents shall pay to the petitioner the costs of the petition. Rule is made absolute accordingly.

26. Operation of this order is stayed for a period of four weeks from today.