Nicotine Sulphate Held to Be an Organic Vegetable Alkaloid: CESTAT Ahmedabad Explains Scope of Chapter 29 vs Chapter 24

The Ahmedabad Bench of CESTAT, in BGP International Vs Commissioner (CESTAT Ahmedabad), examined in depth the excise classification and valuation of Nicotine Sulphate manufactured by M/s. BGP International. The Tribunal ultimately allowed the appeal, holding that Nicotine Sulphate is correctly classifiable as a vegetable alkaloid under Chapter 29 and not as a tobacco product under Chapter 24, and that the extended period of limitation as well as related-party undervaluation allegations were unsustainable.

This order clarifies three critical aspects:

  1. When the extended period under the proviso to Section 11A of the Central Excise Act, 1944 can be invoked;
  2. How Nicotine Sulphate is to be classified—under CTH 29399900 (Chapter 29) or CTH 24039990 (Chapter 24);
  3. When two entities can be treated as “related persons” for valuation under Section 4(3) of the Central Excise Act, 1944.

Factual Background

M/s. BGP International, Mehsana, are engaged in the manufacture of:

  • Organic Manure; and
  • Nicotine Sulphate.

These products are cleared both in the Domestic Tariff Area and for export. During central excise investigation, the department formed a view that Nicotine Sulphate manufactured by the assessee was misclassified.

Department’s Allegations

The department alleged:

  • Nicotine Sulphate should fall under CTH 24039990 (tobacco and manufactured tobacco substitutes),
  • instead of CTH 29399900 (vegetable alkaloids and their derivatives) as declared by the assessee.

On this basis, a show cause notice dated 17.06.2020 was issued proposing:

  • Differential duty of Rs.4,60,00,920/- for the period June-2015 to June-2017 by invoking the extended period under the proviso to Section 11A;
  • Additional duty of Rs.3,56,475/- alleging undervaluation of clearances made to M/s. BGP Healthcare Pvt. Ltd. by treating them as related parties;
  • Interest under Section 11AA; and
  • Penalty under Section 11AC of the Central Excise Act, 1944.

The Commissioner, vide order dated 05.10.2020, upheld:

  • Classification under CTH 24039990;
  • Entire duty demand of Rs.4,60,00,920/- on alleged misclassification;
  • Duty of Rs.3,56,475/- on alleged undervaluation to a related person;
  • Corresponding interest and equal penalty under Section 11AC.

The assessee challenged this order before CESTAT Ahmedabad.

Issues Before the Tribunal

The Tribunal crystallised the controversy into three principal questions:

  1. Limitation:
    Whether the duty demand for June-2015 to June-2017, raised by notice dated 16.06.2020, was barred by limitation or whether the extended period under the proviso to Section 11A was rightly invoked.

  2. Classification:
    Whether Nicotine Sulphate should be classified under:

    • CTH 24039990 (as “Other manufactured Tobacco and Manufactured Tobacco Substitutes; Homogenised or Reconstituted Tobacco; Tobacco Extracts and Essences”); or
    • CTH 29399900 (as “vegetable alkaloids, whether natural or reproduced by synthesis, and their salts, ethers, esters and other derivatives”).

  3. Related Party / Valuation:
    Whether M/s. BGP International and M/s. BGP Healthcare Pvt. Ltd. were “related persons” under Section 4(3) such that valuation should be done at 110% of cost under Rule 9 of the Central Excise Valuation Rules, 2000.

Limitation: Whether Extended Period Under Section 11A Was Applicable

Prior Intimation and ER-1 Declarations

The assessee produced:

  • A letter dated 07.04.2006 from M/s. Alchem International (now BGP International) to the Deputy Commissioner of Central Excise, Gandhinagar, explicitly intimating the manufacture and classification of:

    • Nicotine Sulphate (H.S. Code 29397002),
    • Nicotine Alkaloid (H.S. Code 29397001),
    • Nicotine Polacrilex (H.S. Code 29397009).

  • Monthly ER-1 returns for the relevant period, which clearly showed manufacture and clearance of Nicotine Sulphate under CTH 29399900.

The Tribunal noted that these documents demonstrated that:

  • The department was fully aware, long before the period in dispute, that Nicotine Sulphate was being manufactured and classified in Chapter 29;
  • The classification adopted by the assessee had been disclosed in statutory returns.

No Suppression or Misstatement

Given the above:

  • There was no concealment of material facts or misdeclaration;
  • The essential ingredients for invoking the extended limitation period—such as suppression of facts, wilful misstatement or fraud—were absent.

Relying on settled law that non-supply of information not legally required to be furnished does not amount to suppression, the Tribunal held that:

The demand raised by show cause notice dated 16.06.2020 for the period June-2015 to June-2017 was time-barred.

On this ground alone, the demand was liable to be set aside. The Tribunal referred to judicial precedents where courts have declined to allow extended limitation when data is already available on record through statutory filings.

Classification of Nicotine Sulphate: Chapter 29 vs Chapter 24

Statutory and HSN Framework

The dispute lay between two headings: