The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai Regional Bench, has dismissed the Revenue’s appeal against Godrej Industries Limited, holding that the imported Dehydol LS 1 TH, Dehydol LS 2 TH and Lauryl Alcohol Ethoxylate 2 Mole (LAE 2 Mole) were appropriately classifiable under CTI 3824 9090/3824 9990, and not under CTI 3402 1300 as proposed by the Customs Department.
The bench of S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) found that the products did not satisfy the prescribed water-solubility condition because the test samples showed separation into two layers when mixed with water.
Godrej Industries Limited had imported various chemical products from overseas suppliers, including Dehydol LS 1 TH (One Mol Alcohol Ethoxylate 1214) and Dehydol LS 2 TH (Two Mol Alcohol Ethoxylate 1214) from Thai Ethoxylate Co. Ltd., and Lauryl Alcohol Ethoxylate 2 Mole (LAE 2 Mole) from Shell Eastern Chemicals, Singapore/Thailand.
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For these imports, the company classified the goods under Customs Tariff Item 3824 9090/3824 9990 and claimed the benefit of 0% Basic Customs Duty (BCD) under Serial No. 449(I) of Notification No. 46/2011-Customs dated June 1, 2011, as amended.
However, intelligence developed by the Directorate of Revenue Intelligence (DRI), Ahmedabad alleged that the goods had been wrongly classified. According to the Department, the products were actually non-ionic organic surface-active agents classifiable under CTI 3402 1300, attracting BCD at 5% under the relevant notification.
The dispute consequently involved not merely the tariff description but the applicability of the statutory definition contained in Chapter 34 and the consequential demand of customs duty, interest, confiscation and penalties.
The DRI conducted a detailed investigation, including searches of the company’s factory and office premises, recording statements and collecting documents and records. Representative samples of the imported products were also drawn and sent to the Central Excise and Customs Laboratory, Vadodara, for examination.
The CRCL test report dated March 22, 2018 found the presence of an organic surface-active agent, described the sample as non-ionic, and recorded positive results for alcohol and ethoxylate.
Samples of goods detained at JNCH, Nhava Sheva were similarly tested. The report dated June 7, 2018 also recorded positive findings for organic surface-active agent, non-ionic nature, alcohol and ethoxylate.
Based on these findings and other material gathered during the investigation, the Department issued show cause notices proposing reclassification of the imported goods under CTI 3402 1300; Recovery of customs duty with interest; Invocation of the extended limitation period; Confiscation of goods under Sections 111(m) and 111(o) of the Customs Act, 1962; and Penalties under Sections 112(a), 112(b) and 114A of the Customs Act.
The Principal Commissioner of Customs, while adjudicating the show cause notices, did not accept the Department’s proposed reclassification.
By Order-in-Original dated December 31, 2021, the adjudicating authority classified the goods under CTI 3824 9090/3824 9990, as declared by Godrej Industries, and dropped the proceedings initiated through the show cause notices.
The Revenue challenged this order before CESTAT, Mumbai. Godrej Industries also filed a cross-objection in the departmental appeal.
The Department argued before the Tribunal that the imported products fulfilled the conditions prescribed under Chapter Note 3(a) and 3(b) of Chapter 34.
According to Revenue, the chemical test reports established that the products were non-ionic surface-active agents and therefore appropriately classifiable under CTI 3402 1300.
Revenue also contended that an importer is required to correctly self-assess customs duty under Section 17 of the Customs Act, 1962. The alleged misclassification, according to the Department, reflected an intention to evade payment of duty.
Godrej Industries disputed the Department’s interpretation of Chapter Note 3.
The company argued that the statutory definition of OSAA contains two cumulative requirements.
Under Chapter Note 3 to Chapter 34, products must, when mixed with water at a concentration of 0.5% at 20°C and left to stand for one hour give a transparent or translucent liquid or stable emulsion without separation of insoluble matter; and reduce the surface tension of water to 4.5 × 10⁻² N/m (45 dyne/cm) or less.
The company contended that although the imported goods satisfied the surface-tension requirement, they failed the first requirement because the samples produced a translucent liquid with separation into two layers.
The defence therefore rested on a straightforward proposition: being a non-ionic surfactant by chemical character was not by itself sufficient to bring the product under Heading 3402 when the statutory conditions of Chapter Note 3 were not cumulatively satisfied.
A significant feature of the case was the wording of the departmental test reports.
The CRCL reports confirmed that the sample in water produced a “translucent liquid with separation in two layers.”
Godrej Industries argued that this finding itself demonstrated that the goods did not satisfy the requirement of a transparent or translucent liquid or stable emulsion without separation of insoluble matter.
The company also relied upon independent laboratory reports which similarly recorded a translucent solution with a layer or separation of insoluble matter.
Accordingly, the importer maintained that the products were water-insoluble surface-active products and therefore excluded from Heading 3402.
The Tribunal began its analysis by referring to the statutory framework governing customs classification.
Section 12 of the Customs Act, 1962 provides for levy of customs duties on imported goods at rates specified under the Customs Tariff Act, 1975.
The Tribunal also examined the General Rules for the Interpretation (GIR) of the Customs Tariff. Under GIR 1, classification is determined according to the terms of the headings and the relevant Section and Chapter Notes.
The Tribunal emphasized that the statutory definition, wherever provided, assumes primary importance in determining classification. In the absence of a statutory definition or specific guidance in the HSN Explanatory Notes, trade parlance may be considered.
The central classification contest was between: CTH 3402 — covering organic surface-active agents, including non-ionic surfactants; and CTH 3824 — covering miscellaneous chemical products and preparations of the chemical or allied industries, not elsewhere specified or included.
The Tribunal noted that Heading 3402 specifically covers organic surface-active agents, including anionic, cationic, non-ionic and other types.
However, the tariff contains a specific statutory definition of OSAA under Chapter Note 3, which must be fulfilled before goods can be classified under Heading 3402.
On the other hand, Heading 3824 has a broad residual character, covering chemical products and preparations not elsewhere specified or included.
The Tribunal also examined the HSN Explanatory Notes.
Importantly, the HSN Explanatory Notes to Heading 3402 specifically exclude water-insoluble surface-active agents, products and preparations, indicating that such products fall under Heading 3824.
The Tribunal therefore found that the international classification framework supported the conclusion that water-insoluble surfactant products could not automatically be brought within Heading 3402 merely because they possessed surfactant characteristics.
The products involved were identified as: Dehydol LS 1 TH (One Mol Alcohol Ethoxylate-1214); Dehydol LS 2 TH (Two Mol Alcohol Ethoxylate-1214); and Lauryl Alcohol Ethoxylate 2 Mole (LAE 2 Mole).
The Tribunal noted that these were low-ethoxylated, non-ionic surfactants derived from C12–C14 fatty alcohols and containing one or two moles of ethylene oxide.
The Tribunal explained that the number of ethylene oxide groups has an important bearing on water solubility. Products with only two ethylene oxide groups have virtually no water solubility and tend to be oil-soluble, whereas products containing substantially more ethylene oxide groups demonstrate greater water solubility.
The Tribunal considered the departmental chemical test report particularly significant.
While the report established that the samples contained organic surface-active agents and were non-ionic, the report also stated that the sample in water produced a translucent liquid with separation into two layers.
The Tribunal observed that Chapter Note 3 requires a transparent or translucent liquid or stable emulsion without separation of insoluble matter.
Consequently, the Tribunal held that the test report itself did not establish fulfilment of the requirements of Chapter Note 3 for classification under Heading 3402.
The Tribunal further considered communications from the Singapore Customs authorities concerning the products supplied by the overseas suppliers.
The Tribunal noted that the references from Singapore Customs had persuasive value and stated that, under the Harmonized System, the imported goods were classified under sub-heading 3824.90/3824.99, rather than sub-heading 3402.13 proposed by the Indian Customs authorities.
Although this foreign classification was not treated as independently determinative, it provided additional support for the Tribunal’s conclusion.
After examining the tariff entries, Chapter Note 3, HSN Explanatory Notes, chemical test reports and the technical characteristics of the products, CESTAT concluded that the imported goods were appropriately classifiable under: CTI 3824 9090 / 3824 9990 and not under CTI 3402 1300.
The Tribunal therefore found no reason to interfere with the Principal Commissioner’s order dated December 31, 2021.
Since the Tribunal rejected the proposed reclassification on merits, the foundation of the Revenue’s demand disappeared.
CESTAT specifically held that, as the demand of customs duty itself was unsustainable on merits, the consequential questions relating to interest and penalties did not survive.
The Tribunal accordingly sustained the original adjudication order and dismissed the Revenue’s appeal. The cross-objection filed by Godrej Industries was disposed of.
The Tribunal held that the imported Dehydol LS 1 TH, Dehydol LS 2 TH and Lauryl Alcohol Ethoxylate 2 Mole were correctly classifiable under CTI 3824 9090/3824 9990, rather than CTI 3402 1300. As a result, the proposed customs duty demand, interest, confiscation and penalties could not be sustained.
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