By TIOL News Service

NEW DELHI, JAN 07, 2015: THE issue involved is whether the impugned goods are maize starch classifiable under Tariff heading 11.03 or it is modified maize starch classifiable under Tariff heading 35.05. Maize starch classifiable under heading 11.03 was exempt from duty during the relevant period while modified maize starch classifiable under heading 35.05 was not.

The process of manufacture of the impugned goods is as below -

"The maize undergoes the processes of maize cleaning, steeping and grinding. These processes separate the starch from the maize grain. The starch obtained after the above processes contains fibre and gluten both of which are removed by further separation of starch through the DSM box, Bran Extractor and by centrifuging. The resultant product is the starch slurry which is used to produce the different varieties of starch. To produce Maize starch, BSIL added negligible of potassium permanganate (0.17-0.34 kg/ton) to the starch slurry. The effect of potassium permanganate was controlled by the negating action of sodium meta bisulphite. The neutralizer used was to the extent of 0.43-0.86 kg/tone. The slurry was treated in the above way for a maximum period of two hours. The maize starch (K) was finally obtained by drying this starch slurry."

By classifying the impugned goods as modified maize starch, Heading 35.05, the CCE, Panchkula confirmed a duty demand of Rs.3.17 crores along with interest and penalty.

The adjudicating authority took note of the fact that the quantity of potassium permanganate used is small and that it is used to enhance the brightness of the product; that addition of a chemical resulting in any change irrespective of how it acts on the chemical structure of starch would shift this product from the scope of plain or native starch to a starch commercially processed for specific use by a customer. After referring to the chapter notes in chapters 11 and 35 of CET vis-à-vis the HSN note to chapter heading 35.05, the adjudicating authority concluded that the use of the chemicals changed the product from plain starch to what can be called modified starch.

Before the CESTAT the appellant, in the words of the Tribunal, "laboriously" and in great detail described the manufacturing process and the reason and effect of using small quantity of potassium permanganate and sodium meta bi sulphite to show that these were only for the purpose of enhancing the brightness of starch and did not result in modified starch. The appellant also stated that they used to manufacture modified starch of chapter 35 also on which they used to pay duty and added that modified starch is way more expensive than ordinarily starch and thus even the price at which they sold the impugned product is reflective of the fact that the impugned goods were not modified starch but ordinarily starch.

The Bench observed that in the order passed in the year 2005, the Tribunal had remitted the matter to the original authority for fresh adjudication after examination/cross examination of the chemical examiner but no such examination/cross examination of the CRCL official took place and this alone was arguably a fatal blow to the impugned order. Nonetheless, as the adjudicating authority has ignored the test reports, absence of cross examination has not caused any prejudice against the assessee, the Tribunal added.

Noting that it is well settled that in matters relating to classification the HSN explanatory notes are an authentic guide,the Tribunal extracted HSN note relating to chapter 11.08 & 35.05 and observed -

It is thus evident that mere change in brightness would not result in transporting starch from chapter 11 to chapter 35 unless the change is such as is described in the above quoted explanatory note (to chapter 35.05). In the adjudication order reference is made to the fact that potassium permanganate is an oxidation agent and therefore may have resulted in the oxidation of starch to make it modified starch. The appellants have clearly explained that the small quantity of potassium permanganate which they have used cannot result in oxidation of starch; it can only act as a purifying agent. They also added that the use of meta bi sulphite was to stop any possible action of oxidation of starch. Thus they have been able to convincingly drive home the point that the process which they undertook was only for purification of starch which increased its brightness.

After referring to technical literature viz. book on Modified Core Starches by Ralph W. Kerr &Corn Starch Modified and Uses, by F.T. Orthoefer of A.E. Stanley Manufacturing Co. Decatur Illinois, the CESTAT observed that it was clear that addition of potassium permanganate is only to remove impurities and that reagents are used for whitening of the starch by bleaching xanthophylls and related pigments.

Thereafter, the CESTAT held -

"13. The adjudicating authority's observation that any physical change like change in brightness/whiteness will result in "modified starch" covered under Ch. Heading 35.05 is devoid of any basis. Further mere conjecture (on the part of the adjudicating authority) "that potassium permanganate may have resulted in the oxidation of starch" cannot be the basis of concluding that such oxidation actually happened specially when there is no evidence thereof and the appellants have convincingly contended that no such oxidation was allowed to happen nor it actually happened. It is also clear from the explanatory notes to chapter heading 35.05 that whether product would qualify for coverage under heading 35.05 can be determined on the basis of changes in properties of the product. Thus, as a corollary, unless the product is tested to ascertain if such changes actually happened, it is not possible to infer whether the product is modified starch warranting classification under 35.05…"

In fine, it was held that there was no basis whatsoever to conclude that the impugned product was "modified starch" classifiable under chapter 35 of CETA, 1985. Consequently, the order of the CCE, Panchkula was held to be unsustainable and set aside.

The appeal was allowed.

(See 2015-TIOL-51-CESTAT-DEL)