By TIOL News Service

MUMBAI, DEC 24, 2013: THE appellants are engaged in processing of Cinematographic Films.

For the purpose of processing of cinematographic films, the appellant makes various chemical preparations known as colour developer, stop bath, bleach, fixer, stabilizer, etc. by mixing different chemicals in pre-determined quantities. During the processing, the film passes through various baths/chambers/stages consisting of these chemical preparations.

The Revenue was of the view that the chemical preparations made during the processing of these films are classifiable as "chemical preparations for photographic uses" under CETH 3707 of the CETA.

Accordingly, notices were issued demanding excise duty on these chemical preparations.

The Revenue also noticed that during the processing of the film, silver residues are also obtained and these silver residues according to the Revenue are classifiable under Chapter 26 of the CE Tariff and excise duty is payable thereon.

Demand notices were issued and confirmed by the lower authorities along with equivalent penalty and interest.

When the matter had come before the Tribunal earlier, Vide order No. A/582-587/08/C-II/EB dated 11/07/2008 the Bench had remanded the matter to the adjudicating authority with the following directions:

" 17. It can be noticed from the above reproduced findings that the adjudicating authority has merely followed the order-in-original no.5/2000 dated 26/06/2000, wherein findings were given as regards the marketability. We have already held that such findings are not binding on the appellantsars the order-in-originalNo.5/2000 dated 26/06/2000 had dropped the proceedings initiated against the appellants. We also find that the Counsel for the appellants had taken us through various evidences to indicate that the invoices, which were produced by the revenue were of chemicals, which are used for still photographic. They tries to point out that the chemical, which are used by the appellants are totally different than the chemical, which are used is the development of still photography. We are not sure whether these evidences were produced before the adjudicating authority and that he has not considered these evidences.

18. Without giving any opinion on the merits of the case, we are of the considered view, that the adjudicating authority has to appreciate the differences, if any, as regards the chemicals for which proof of marketability has been brought on record and the chemical solutions, which are used by them in their laboratory. There being no findings on this point. All the appeals are allowed by way of remand to the adjudicating authority to reconsider the issue inall these cases without getting g influenced by the findings in order-in-original NO. 5/2000 dated 26/06/2000. The adjudicating authority shall apply his mind independently on the submissions made by the appellants as regards the marketability of the products and give a detailed and speaking order on the issue. ."

This order was challenged by the Revenue but the Bombay High Court dismissed the appeal.

Pursuant to denovo adjudication, the present orders have been passed and since the demands were confirmed again, the appellants are before the CESTAT.

It is submitted that the issue was first examined by the department as early as in 1998 on the basis of an investigation done by the DGAE in Bangalore in the case of Prasad Film Laboratories and the adjudicating authority had held that various chemical preparations, namely, pre-bath, developer, bleach, stop bath, fixer bath stabilizer and respective replenisher solutions obtained by mixing various photographic processing chemicals are not marketable as they are prepared in situ and captively consumed and are never sold. Inasmuch as the demand was dropped and this order since was upheld by the Commissioner(A), Revenue had gone into appeal before the Tribunal and the same was dismissed by holding that chemical preparations captively consumed in the processing/developing of negative cinematographic films do not have any shelf life and hence are not marketable and not covered under sub-heading 3707.00 of Central Excise Tariff. See 2005-TIOL-1083-CESTAT-BANG.

In the matter of classification of Hypo Solution Waste (Silver Residue) it is submitted that as per the HSN Explanatory Note, waste of precious metal is classifiable under Chapter 71 and Chapter 26 specifically excludes the waste of precious metals. And further, under Chapter 71, silver is exempt from duty and therefore, the impugned demands are not sustainable in law.

It is further submitted that in spite of specific directions from this Tribunal to examine the marketability aspect of the goods, the adjudicating authority has not examined the same and merely confirmed the duty demand and, therefore, the impugned orders are not sustainable in law.

It is also submitted that the appellant has been discharging service tax on the film processing activity since 2001-2002 onwards and therefore, the demand of excise duty on the chemical preparations cannot be made by treating the same as manufacturing activity.

Three departmental representatives including the Commissioner (AR) made submissions on behalf of the Revenue.

As regards the marketability, it is the Revenue's contention that as per the information available on the internet, chemical developers are marketed under various trade names, such as, CD-2, CD-3 and CD-4. Similarly, M/s. Kodak India Ltd. themselves are marketing Kodak Kit chemicals for colour motion picture processing and therefore, the impugned goods which are similar to those available in the market can be considered as "marketable".

As regards the silver residue, it is fairly conceded by the Revenue that the product merits classification under Chapter 71 and not under Chapter 26.

The Bench adverted to its earlier order of remand and inter alia observed -

"7.3 …, we find that Revenue has not led any iota of evidence which shows that the various chemical preparations made by the appellant while processing of the cinematographic films are marketable or are marketed. There is no dispute about the fact that the appellants have not, at any point of time, marketed these goods. Further, there are a series of decisions passed by this tribunal affirmed by the Hon'ble Apex Court in the case of Prasad Film Laboratories, Famous Cine Laboratories and Navrang Cine Center (P) Ltd. (cited supra) wherein this Tribunal while considering an identical matter has givben a categorical finding that the chemical preparations used in the processing of cinematographic films are not goods known to the market and hence are not exigible to duty. Further, the expert's opinion adduced by the appellant from M/s.Kodak India Ltd. also clearly shows that these preparations are mixed prior to their usage and such mixed chemical preparations are prone to oxidation and other chemical reactions which could make them less effective and such chemicals are not marketed. The department has not tested any of the samples to ascertain the shelf life/other parameters relevant for examining the issue of marketability of the products…."

In the matter of the Revenue submission that various chemical preparations used in cine film processing are marketed by many including M/s. Kodak India Ltd. , the Bench raised a query as to whether those goods are same or similar to the goods made by the appellant in their studio. However, Revenue could not confirm the same.

So, the Bench observed -

"…Therefore, merely because certain chemicals are marketed cannot lead to the conclusion that the chemical preparations made in situ by the appellant are also marketable and no effort whatsoever has been made by the Revenue to establish the marketability and Revenue has failed miserably in this regard. Further, the appellant has produced a letter from M/s. Kodak India (P) Ltd. dated 04.10.2013 wherein it has been stated that "the kit chemicals marketed by them are in a concentrated form and have to be mixed with water as per specifications for different baths and after dilution, the chemicals have a very short shelf life and are not marketable."

The CESTAT, therefore, concluded -

"7.5 In view of the above and in the absence of any evidence to the contrary, the appellant's contention that the various chemical preparations produced by them in situ and captively consumed are not marketable goods falling under CETH 3707 of the Central Excise Tariff have to be upheld. Accordingly, the demands confirmed in the impugned orders under the aforesaid heading are set aside. As regards the duty demand on silver residue which is arising during the processing of the film, as per Chapter Note to Chapter 26, silver waste arising in the processing of the cinematographic films stands excluded from Chapter 26 and are properly classifiable under Chapter 71 and during the material period, the silver residue was exempt from excise duty. Therefore, the excise duty demand in respect of silver residue also does not sustain. Once the duty demands fail, all consequential demands towards interest and penalties also fail."

In fine, the appeals were allowed with consequential relief.

(See 2013-TIOL-1901-CESTAT-MUM)