The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a central excise demand exceeding ₹4.63 crore against Gujarat-based BGP International, holding that Nicotine Sulphate is correctly classifiable as a vegetable alkaloid under Chapter Heading (CTH) 2939 and not as a manufactured tobacco product under CTH 2403.
The bench of Dr. Ajaya Krishna Vishvesha (Judicial Member) and Satendra Vikram Singh (Technical Member) ruled that the entire demand was barred by limitation and rejected the department’s allegation of undervaluation in related-party transactions.
The appellant/assessee manufactures Organic Manure and Nicotine Sulphate and supplies its products both in the domestic market and overseas. The Central Excise Department initiated an investigation alleging that the company’s Nicotine Sulphate had been wrongly classified under CTH 29399900 instead of CTH 24039990, the latter attracting a significantly higher rate of excise duty.
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Following laboratory testing and investigation, the department issued a show cause notice dated June 17, 2020 proposing recovery of ₹4.60 crore towards differential excise duty on account of alleged misclassification. An additional demand of ₹3.56 lakh was raised alleging undervaluation of goods supplied to BGP Healthcare Pvt. Ltd., which the department treated as a related party. Interest and equivalent penalties were also proposed. The Commissioner confirmed the entire demand, prompting the company to approach CESTAT.
The appellant argued that the department had been aware for years that Nicotine Sulphate was being manufactured and classified under CTH 2939. It relied upon a communication sent to the excise authorities as early as April 7, 2006, informing them about manufacture of Nicotine Sulphate under Chapter 29. The company also pointed out that monthly ER-1 returns consistently disclosed manufacture and clearance of the product under the same tariff heading.
The company further contended that Nicotine Sulphate is a highly toxic insecticide and cannot be regarded as manufactured tobacco, tobacco substitute, or tobacco extract merely because nicotine is derived from tobacco. It also challenged the department’s reliance on laboratory reports prepared from samples drawn from another entity’s premises and argued that the Chemical Examiner had exceeded his authority by expressing an opinion on tariff classification.
The Tribunal first examined whether the extended period of limitation could be invoked.
It observed that documentary evidence clearly established that the department had already been informed in 2006 regarding manufacture and classification of Nicotine Sulphate under Chapter 29. Further, the appellant had regularly filed statutory ER-1 returns disclosing manufacture and clearance of the product under CTH 29399900.
In these circumstances, the Bench held that there was no suppression, misstatement or concealment of facts capable of justifying invocation of the extended limitation period. Consequently, the show cause notice issued in June 2020 covering the period June 2015 to June 2017 was held to be barred by limitation, making the entire duty demand unsustainable on this ground alone.
The Tribunal nevertheless proceeded to examine the classification issue on merits.
After analysing the Harmonised System of Nomenclature (HSN) explanatory notes and the manufacturing process, the Bench concluded that Nicotine Sulphate is a vegetable alkaloid falling under Heading 2939.
The Tribunal noted that Chapter 29 specifically includes alkaloids and their derivatives, and Nicotine Sulphate is produced by chemically treating extracted nicotine with dilute sulphuric acid. It observed that although Chapter 29 generally covers separate chemically defined compounds, the HSN specifically provides exceptions for alkaloids and their derivatives, making the department’s reliance on Chapter Note 1(a) misplaced.
The Bench also emphasised that Nicotine Sulphate is commercially used as an insecticide and possesses characteristics entirely different from tobacco products covered under Chapter 24. Accordingly, the attempt to classify it as a tobacco extract or manufactured tobacco product was legally unsustainable.
A significant aspect of the ruling relates to the evidentiary value of the laboratory reports.
The Tribunal found that the department’s primary reliance was on a CRCL report prepared from a sample drawn from BGP Healthcare Pvt. Ltd.’s premises in March 2016, rather than from the appellant’s factory. The sample had also been tested after more than one year, contrary to the applicable Bureau of Indian Standards requiring testing within 90 days.
Further, the sample was drawn in the absence of the manufacturer or its representative, violating CBIC’s own supplementary instructions governing sampling procedures.
The Bench also reiterated settled law that a Chemical Examiner is competent only to provide analytical findings and cannot determine tariff classification, which falls exclusively within the jurisdiction of the adjudicating authority.
Significantly, two subsequent CRCL reports based on samples drawn directly from the appellant’s factory identified the product as an aqueous solution of Nicotine Sulphate, an organic chemical, thereby contradicting the earlier report relied upon by the department. The Tribunal therefore rejected the earlier report as unreliable.
The Tribunal also rejected the department’s allegation that BGP International and BGP Healthcare Pvt. Ltd. were related persons for valuation purposes.
The department had alleged that because one individual was both a partner in the appellant firm and Managing Director of BGP Healthcare, transactions between them attracted Rule 9 of the Central Excise Valuation Rules requiring valuation at 110% of production cost.
However, the Bench found that the show cause notice and adjudication order contained no supporting evidence establishing the statutory relationship contemplated under Section 4 of the Central Excise Act. Merely having a common individual associated with both entities was insufficient to establish that they were related parties.
Consequently, the Tribunal also set aside the separate demand of ₹3.56 lakh together with the corresponding interest and penalty.
The Ahmedabad Bench of CESTAT quashed the demands of differential excise duty, interest and penalties. It held that the proceedings were barred by limitation, Nicotine Sulphate was correctly classifiable under CTH 29399900 as a vegetable alkaloid, the department’s laboratory evidence was unreliable, and the allegation of related-party undervaluation was unsupported by evidence.
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