COMMISSIONER OF CENTRAL EXCISE, BANGALORE v. M/S. KARNATAKA AGRO CHEMICALS

A The Judgment of the Court was delivered by S.H. KAPADIA, J. These civil appeals concern classifi- cation of "micronutrient" compounds for the purpose of excise duty. According to the Department, micronutrient is a 'Plant Growth Regulator' ("PGR" for short), therefore, it falls under CSH B 3808.20 of the Central Excise Tariff as a chemical product whereas according to the assessee it falls under CSH 3105.00 (other fertilizers). By the impugned judgment dated 26.2.07, CESTAT has <1ccepted the contention of the assessee that their product(s) "multi micronutrient" (the impugned product) would c fall under CSH 3105.00 as contended by the respondent-as- sessee, hence these civil appeals are filed by the Department.

2Copy pinpoint2. For the sake of convenience we reproduce hereinbe- low the facts as reproduced in the case of Commissioner of Central Excise, Bangalore v. Mis. Karnataka Agro Chemicals ... D [Civil Appeal Nos. 378-381 OF 2008]. 1,

3Copy pinpoint3. Respondent-assessee manufactures "multi micronutri- . ents" for soil application and for foliar application. The Ministry of Agriculture has granted registration to the assessee's E product(s) as "fertilizer" in terms of Section 2(h) of the Fertiliser (Control) Order.

4Copy pinpoint4. By show cause notices dated 26.8.02, 25.2.03, 1.10.03 and 24.5.04, the Department alleged that the assessee had :'~ misdeclared that the impugned product(s) contained nitrogen and had cleared the same without payment of duty. According to the Department, the label on each of the products of the as- sessee indicated the composition of each of the several prod- ucts. The label indicated the percentage of zinc, ferrous, man- ganese and boron (micronutrient elements). In the label there was no mention of N (nitrogen), P (phosphorus) or K (potas- sium). According to the show cause notices, the chemical ~naly- • sis of the samples confirmed the fact that fertilizing elements N, P or K were .not there in "micronutrient compounds" of the as- ,~ sessee. According to the show cause notices, the mixtures manufactured by"the assessee did not contain N, P or K as

COMMISSIONER OF CENTRAL EXCISE v. MIS. 989

KARNATAKAAGRO CHEMICALS [S.H. KAPADIA, J.]

• , essential constituents. That, in any event, N, P or Kare not the essential constituents of the micronutrients. That, in the im- pugned product(s) there was no N, P or K as fertilizing element. That, addition of N, P or K was only a pretence to misdeclare their product(s). Therefore, the impugned product(s) were clas- sifiable under CSH 3808.20 of the Central Excise Tariff. B

5Copy pinpoint5. In reply to the above show cause notices, assessee sub- mitted that its product(s) were got tested on three occasions by the Department which indicated presence of nitrogen in all the products. That, on perusal of Explanatory Note 6 to Chapter 31, it was sufficient if nitrogen is present in the product(s) of the assessee to merit classification under CSH 3105.00 Accord- ing to the assessee, nitrogen was an essential constituent of the assessee's product(s) and-, therefore, the product(s) came within CH 31.05 For that purpose reliance was placed by the assessee on Explanatory Note 6 to Chapter 31. According to the assessee, even in the trade parlance, the product(s) manu- factured by the assessee are known and used as fertilizers and since nitrogen is a fertilizing agent it was an essential constitu- ent in its product(s) used as fertilizers.

6Copy pinpoint6. We quote hereinbelow Explanatory Note 6 to Chapter E 31 of the Central Excise Tariff which reads as below:

"CHAPTER 31

FERTILISERS F Notes :

6. For the purposes of heading No.31.05, the term "other fertilizers" applies only to products of a kind used as fertilizers and containing, as an essential constituent, at least one of the fertilizing elements nitrogen, phosphorus G or potassium."

7Copy pinpoint7. We also quote hereinbelow CSH 3105.00 of the Cen- tral Excise Tariff which reads as below:

990 SUPREME COURT REPORTS [2008) 8 S.C.R.

A "CHAPTER 31 ( . FERTILISERS

Heading Sub- Description of goods Rate of duty No. heading B No, .

(1) (2) (3) (4) 31.05 3105.00 Mineral or chemical fer- 16% tilizers, containing two or .

three of the fertilizing el- c ements, nitrogen, phos- phorous and potassium; other fertilizers

D .8. We also quote hereinbelow Explanatory Note 1 to Chap- ter 38 of the Central Excise Tariff which reads as below: "CHAPTER 38 MISCELLANEOUS CHEMICAL PRODUCTS E Notes:

1. This Chapter does not cover: (a) Separate chemically defined elements or compounds with the exception of the following: F (1) Artificial graphite (heading No.38.01 ); (2) Insecticides, rodenticides, fungicides, herbicides, anti-sprouting products and plant- growth regulators, disinfectants and similar G products, put up as described in. Heading No.38.08."

9. We also quote hereinbelow CH 3808 of the Central Ex- \ cise Tariff which reads as below:

COMMISSIONER OF CENTRAL EXCISE v. MIS: 991 KARNATAKAAGRO CHEMICALS [S.H. KAPADIA, J.]

• 'I "CHAPTER 38 A MISCELLANEOUS CHEMICAL PRODUCTS

Heading Sub- Description of goods Rate of duty No. heading No. B (1) (2) (3) (4) 38.08 Insecticides, rodenti- cides, fungicides, herbi- cides, antisprouting products and plant c growth regulators, disin- fectants and similar products, put up in forms or packings for retail sale or as preparations D or articles (for example, , sulphur-treated bands, wicks and candles, and fly-papers) Plant growth regulators 16% E 3808.20 3808.90 Other 16%

10. We also quote hereinbelow Circular No.392/25/98- CX., dated 19.5.1998 issued by CBEC which reads as follows: ,F

"Micronutrients - Classification of [Chapter 28/31]

Circular No. 392/25/98-CX., dated 19-5-1998

[From F.No. 106/1/98-CX.3]

Government of India G

Ministry of Finance (Department of Revenue),

New Delhi

.992 SUPREME COURT REPORTS [2008] 8 S.C.R.

A Subject : Central Excise - Classification of Micronutri- ( • ents - Clarification Regarding. Attention is invited to the instructions contained in Board's Circular No. 79/79/94-CX., dated 21-11-1994 [See 1994 (74) E.L.T. T46] wherein Board had clarified that B Micronutrients listed under the Fertiliser (Control) Order, 1985 and their mixtures (with or without N. P. K. ), as notified by the Central Government or a State Government would be classifiable under CET Chapter 31.05.

c 2. A doubt has been raised regarding classification of certain Micronutrients such as compounds of Zinc, Boron, Manganese, Molybdenum, Iron etc., which are required in minor quantities to regulate plant growth - whether classifiable as fertilisers (31.05), plant growth.regulators (38.08) or as separate chemically D defined compound (Ch. 28).

3. The matter has been re-examined in the light of Supreme Court judgment in the case of Ranadey Micronutrients v. Collector of Central Excise - Civil E Appeal No. 5404 of 1993, decided on 10-9-1996 - 1996 (87) E.L. T. 19 (S.C.). Micronutrients are basically salts of elements such as Zinc, Boron, Manganese, Molybdenum, Iron etc., known as trace elements. These are essential for plant growth in small amounts only and their absence leads to stunted growth. These elements are supplied in minor quantities to regulate the formation of hormones etc., which in turn alter life processes of the plant so as to accelerate growth, enhance yield and improve quality, thus indirectly contributing to regulate plant growth.

4. According to HSN Explanatory Notes, plant growth regulators are applied to alter the life process of the plant so as to accelerate or retard growth, enhance yield, improve quality offacilitate harvesting, etc. Plant H hormones are one type of plant growth regulators.

COMMISSIONER OF CENTRAL EXCISE v. M/S. 993 KARNATAKAAGRO CHEMICALS [S.H. KAPADIA, J.]

• Synthetic organic chemicals are also used as plant A ' growth regulators.

5. Fertilizers are materials added to soil and, sometimes to foliage to supply nutrients to sustain plants and promote their abundant and fruitful growth. The elements that constitute these plant foods are 8 divided into three classes - (1) Primary-Nitrogen (N), Phosphorous (P) a11d Potassium (K), (2) Secondary - Calcium (Ca), Magnesium (Mg) and Sulphur (S) and (3) Minor or so called micronutrients - Iron (Fe), Manganese (Mn), Copper (Cu), Zinc (Zn), Boron (8) c and Molybdenum (Mo). However, for the purpose of classification of micronutrients as 'Other Fertilizers' in Heading 31.05 CET, the scope of the term 'Other Fertilizers' has to be determined in the light of Note 6 of Chapter 31. Further, the specific exclusion of . D separate chemically defined compounds as laid down in the HSN Explanatory Notes to Heading 3105.90, must also be borne in mind. If, the micronutrient is a separate chemically defined compound, it will be classifiable under Chapter 28/ E

29. If not so, and if in accordance with Note 8 to Chapter 31, it contains N, P or K, it will be classifiable under Chapter Heading 31.

6. Further it is also stated that notification under F.C.O. is irrelevant for deciding classification under the F Central Excise Tariff and regardless of such notification, the appropriate consideration should be:- (i) whether or not the micronutrient in question is a separate chemically defined compound. If it G is, then classification under 31.05 is ruled out; ,, and (ii) if it is not, whether it contains N, P or K as laid down in the Explanatory Notes. H

994 SUPREME COURT REPORTS [2008] 8 S.C.R.

A 7. Therefore, it is clarified that classification of ~ • micronutrients may be done in accordance with the above guidelines.

8Copy pinpoint8. The above clarification may be brought to the notice ofthe lower field formations and the trade interests 8 may also be suitably advised.

9Copy pinpoint9. Board's earlier Circular No. 79/79/94-CX, dated 21- 11"1994 stands modified accordingly.

10Copy pinpoint10. All pending assessments may be finalized on the c above basis." 11.At this stage we need to consider the order passed by the Adjudicating Authority. The main issue which arose for determination was: whether the impugned product(s) manufactured by the assessee was classifiable as Plant Growth 0 Regulator ("PGR") under CSH 3808.20 or whether it was "other fertilizer" under CSH 3105.00. The main submission made by the Department in the show cause notices was that to classify the. impugned product(s) under CSH 3105.00, nitrogen is not E the essential element of micronutrients. That, though in the impugned product(s) nitrogen did exist, it did not exist as a · fertilizing element but as a chelating agent and consequently the impugned product(s) was not classifiable under CSH 3105.00. In this connection, the Adjudicating Authority placed I reliance on the Report of the Chemical Examiner dated 12.7.01. F According to the Adjudicating Authority, in any event, mere trace of nitrogen in the impugned product(s) was not sufficient to classify the same under CHS 3105.00. Reliance was also placed on the labels, affixed on the impugned product(s), by the Adjudicating Authority to show that "Multi Micronutrients" G manufactured by the assessee for soyabean, coffee, citrus, tea nursery etc. only indicated that they could be used to increase or improve the yield in terms of quality and quantity and since PGRs are organic chemicals synthesized in the plant to regulate its growth and development the impugned product(s) fell under H CSH 3808.20 of the Central Excise Tariff. According to the

COMMISSIONER OF CE.NTRAL EXCISE v. MIS. 995

KARNATAKAAGRO CHEMICALS [S.H. KAPADIA, J.]

.' Adjudicating Authority, the content of nitrogen, present in the impugned product(s), was only 0.31 %, which was not sufficient to be called as "fertilizing element" and that the said nitrogen was used only as a chelating agent and, therefore, it was not sufficient enough to act as a fertilizing element, consequently the impugned product(s) fell under CSH 3808.20. According to the Department, PGR is an item in CH 38.08. The said item is a specific item which would override the item "other fertilizers" in CSH 3105.00. According to the Adjudicating Authority "fertilizer" is a general entry whereas PGR is a specific entry and, therefore, the specific entry will override the general entry c in the matter of classification.

12Copy pinpoint12. The order of the Adjudicating Authority was overruled by the Tribunal which came to the conclusion by the impugned judgment thatPGRs are chemical compounds; that in the show cause notices there was no allegation made by the Department that the impugned product(s) was a chemically defined com- pound; that in fact the impugned product(s) was a mixture of various inorganic substances and, therefore, it cannot be clas- sified under CSH 3808.20. According to the Tribunal, classifi- cation of "micronutrients" has been the subject-matter of three circulars issued by CBEC, the first was dated 24.5.90 in which micronutrients were classified under CH 38.08 on the ground that it did not contain nitrogen, phosphorus or potassium;· the second was issued on 21.11.94 in which it was stated that mi- cronutrients with or without N, P, K stood recognized as a fertil- F izer and on 19.5.98 third Circular was issued clarifying that in order to classify micronutrients two tests are required to be fol- lowed, namely, whether or not the micronutrients is a separate chemically defined compound and if it is so then classification under CH 31.05 shall stand ruled out and if the said micronutri- G ents is not a separate chemically defined compound then one has to find out whether it contains N, P or K in terms of Note 6 to chapter 31. In this case the Tribunal observed that even in the Circular dated 19.5.98 issued by CBEC there is no prescribed percentage of any of the above elements in the impugned. H

996 SUPREME COURT REPORTS [2008) 8 S.C.R.

A product(s}. According to the Tribunal, there is also no specific 'f I mention of micronutrients in the said Explanatory Note which ;- ' has led to confusion. Therefore, according to the Tribunal even a trace of nitrogen in the impugned product(s) was sufficient to classify micronutrient as "other fertilizer" in CSH 3105.00, hence )(\ Hi B these civil appeals by the Department.

13Copy pinpoint13. At the outset, it may be stated that in a generic sense "micronutrients" may be a kind of fertilizer in the functional sense but for the purposes of Central Excise Tariff they are excluded from the scope ofCH 31.05 (fertilizers) by virtue of Chapter c Note 6 which requires the term "other fertilizers" to include only those products used as fertilizers and containing N, P or K as an essential constituent which is not the case in respect of mi- cronutrients.

14Copy pinpoint14. Therefore, one needs to ascertain the composition of "" D micronutrients. In this connection, we wish to quote from cer- tain encyclopedias/chemical dictionaries as follows: (i) According to the "Scientific Encyclopedia" by Van Nostrand, "fertilizer" is a substance which is often a E combination of substances of organic composition, natural or manufactured, in solid or liquid form. The "micronutrient" consists of Boron (B), Copper (Cu), Iron (Fe), Manganese (Mn), Zinc (Zn) and Molybdenum (Mo). I

15Copy pinpoint15. The important thing to be noted is that N, P or K is not ' mentioned as an element of "micronutrient". (ii) According to the "Gardener's Guide to Fertilizing Trees and Shrubs" plants require 17 elements for normal growth. Carbon, hydrogen and Oxygen are G found in air and water.Nitrogen, potassium, ,.J'.,o'; magnesium, calcium, phosphorous and sulfur are G absorbed from the soil. The last 6 elements are used in large amounts by the plant and are called macronutrients. There are 8 other elements which H

COMMISSIONER OF CENTRAL EXCISE v. M/S, 997 ., KARNATAKAAGRO CHEMICALS [S.H. KAPADIA, J.] ... are used in smaller amounts. These are called A micronutrients or trace elements which include iron, zinc, molybdenum, manganese, boron, copper, cobalt and chlorine. The nutrients that are most likely to limit plant growth are nitrogen, phosphorus and potassium. B

• (iii) According to the "Scientific Encyclopedia" by Van Nostrand, a 'plant growth regulator' is essentially a chemical substance which is concerned with plant growth and which provides tonic to the plant growth. It is a plant hormone. It is an organic compound C which controls growth. (iv) According to the www.en.wikipedia.org "micronutrients" are vitamins and minerals. Vitamin is an organic compound. Vitamins are classified by 0 their biological activities and not· by their structure. Vitamins have diverse bio-chemical functions including functions as hormones, therefore, plant hormones are also known as plant growth regulators. Plant hormones are made of chemicals that can vary in structure from one plant to another. E (v) According to the "McGraw-Hill Encyclopedia of Science & Technology" materials added to the soil or applied directly to crop, to supply elements needed for nutrition of the plant is called as "fertilizers". F The chemical elements - nitrogen, phosphorus and potassium are macronutrients or primary fertilizer elements which are required in greatest quantity. Sulphur, calcium and magnesium are secondary .. elements necessary for the health of vegetation. They G are required in lesser amounts as compared to • macronutrients. The other elements include boron, cobalt, copper, iron, manganese, molybdenum and zinc. These a1~ required in traces. These minor elements are called micronutrients. Many H

COMMISSIONER OF CENTRAL EXCISE v. MIS. 999

KARNATAKAAGRO CHEMICALS [S.H. KAPADIA, J.] ..• per se, as against macronutrients, do not contain N, P or K. A

20. Micronutrient(s) functionally may be a Fertilizer but not in terms of composition. In fact, N, P or K is the constituent ele- ment of macronutrient and not of micronutrient.

21. Coming to PGRs, it needs to be emphasized that they B are organic compounds, other than nutrients, which in small quantity inhibits, promotes, alters or modifies physiological pro- cesses in plants.

22. In the present case, the impugned product(s) is "multi micronutrient". It is contended on behalf of the assessee that c the impugned product(s) contains nitrogen, hence it is classifi- able as "other fertilizer" under CSH 3105.00. It is contended that nitrogen is an essential constituent of the impugned product(s) and, therefore, the same is classifiable as "other fer- "" tilizers". D

23. Tl1erefore, the relevant question to be asked is- what is the method of manufacture of"multi micronutrient"? This ques- tion becomes relevant as the impugned product(s) is a mixture of various inorganic substances. It is the "method of manufac- ture" which has a strong bearing on the question whether the product(s) needs to be classified under CSH 3808.20 or under CSH 3105.00. This aspect has not been examined by the Adju- dicating Authority. "' 24. It is alleged by the Department that N, P or Kare not the essential constituents of micronutrient(s). We agree. How- ever, in this case, the impugned product(s) is "multi micronutri- ent" which the assessee claims to be a mixture of various inor- ganic substances. In this connection it is important to note that two tests have been formulated in the circular of CBEC dated .. 19.5.1998, namely, whether the subject-product(s) is a chemi- G cally defined compound, if so, it goes out of CSH 3105.00. If not, whether the said product(s) contains N, P or K as constitu- ent element in terms of explanatory note 6.

25. In the show cause notice, no allegation was made by H

1000 SUPREME COURT REPORTS [2008] 8 $.C.R.

A the Department that the impugned product(s) is a distinct chemi- . ;

cal compound. Therefore, the only question is whether the im- pugned product(s) contains nitrogen as an "essential constitu- ent". According to the assessee, the impugned product(s) is a mixture of various inorganic substances whose essential con- B stituent is nitrogen which makes it a fertilizer. It is this point which arises for consideration, viz, whether 0.31% of nitrogen found to exist in the impugned product(s) would make it a fertilizer. In this connection, the aforestated scientific study indicates that PG Rs are organic compounds, other than nutrients. As com- e pared to nutrients which play a major role in the plant growth as a whole, PGRs. play a restrictive role. PGR do not contain N, P or K. In the impugned product(s) manufactured by the asses- see, PGR exists. Therefore, the question to be asked is whether presence of mere 0.31% of nitrogen would make the PGR in the impugned product classifiable as "other fertilizers" in CSH 0 3105.00. In our view, essentially the impugned product is PGR. However, assessee contends that the impugned produc;t(s) is a mixture of various inorganic substances and, therefore, it is for the Adjudicating Authority to go into composition and find out whether 0.31 % of nitrogen would convert PGR into nutrient falling under CH 31.05. Whether with addition of 0.31% of nitro- gen, the PGR becomes "other fertilizers" in CSH 3105.00 is the question which needs to be examined by theAdjudicating Au- thority as it is the case of the Department that the assessee has added nitrogen only as a pretence so that the impugned product(s) could be classified as "other fertilizer" under CSH 3105.00.

26. For the aforestated reasons, on the point of classifica~ tion and not on the point of invocation of larger period (which is separately dealt With hereinafter) we set aside the impugned judgment dated 26.2.07 of CESTAT and remit the matter to the Adjudicating Authority for de novo determination of the said case in accordance with law.

27. On the question of invocation of extended period of limitation, we are in agreement with the view expressed by the

COMMISSIONER OF CENTRAL EXCISE v. M/S. 1001 KARNATAKAAGRO CHEMICALS [S.H. KAPADIA, J.] .. Tribunal that the larger period of limitation was not invokable by the Department. As stated above, three Circulars have been issued by the Department. Till today, the controversy regarding the classification of "micronutrient fertilizers" was not settled. There is even a conflict of views between Ministry of Finance and Ministry of Agriculture. In the circumstances, question of invoking extended period of limitation does not arise. It is well- settled that mere non-declaration is not sufficient to invoke the larger period but some positive act of suppression is required for invoking larger period of limitation under Section 11 A of the Central Excise Act, 1944 [See: Padmini Products v. Collector c of Central Exc{se - 1989 (43) ELT 195 (SC) ]. Therefore, in the present case, there is no warrant to invoke larger period of limitation or to impose penalty and to that extent we uphold the order of the Tribunal. .

28. Accordingly the civil appeals are partly allowed to the D • extent indicated above with no order as to costs . N.J. Appeals partly allowed.