#GSTCase-40-Tax Rate on Quick Lime/Slaked Lime having purity in Excess of 86%- A Classic Case of Board Circular (1991), CESTAT Decision, HSN Explanatory Notes and AAR Pre and Post GST Regime
Palaniappan Chinnadurai- 102 taxmann.com 35 (AAR – TAMILNADU)
What is the applicable chapter and GST rate for Quicklime having 86% Calcium oxide content and Slaked lime having 86% Calcium hydroxide content?
The Applicant manufactures Industrial Grade Quick Lime and Slacked Lime and the purity of Quick Lime is 86% Calcium Oxide (Cao) content and purity of Slacked Lime is 86% Calcium Hydroxide. The purity range between 70 to 90%, and sell to the Water Treatment Plants and Industries.
- Contention of the Applicant: It would be apt to highlight that in the given case, applicant himself has contended that they manufacture Quick Lime and Slaked Lime, which in purity range between 70 to 90%, and sell to the Water Treatment Plants and Industries and according to them their Product would fall under the Chapter 28 rather than Chapter 25 and taxable at the rate of 18% rather than 5%. In the above backdrop, contention of applicant are as follows:
- Quicklime and Slacked Lime with Low Purity-Less than 70%:
Quicklime of low purity (Below 70% Calcium Oxide content) and Slacked Lime which is of low purity (Below 70% Calcium Hydroxide content) which are used for building purposes i.e. white washing etc., will come under chapter 25 and attracts 5% GST rate.;
- Quicklime and Slacked Lime with higher Purity: More than 70%:
Quick Lime which is of high purity (Above 70% Calcium Oxide content) and Slacked Lime which is of high purity (Above 70% Calcium Hydroxide content) which are used for industrial purposes like Steel making, Chemical Plant etc., will come under chapter 28 and attract 18% GST rate.
CBEC Authority for Advance Rulings, in the Ruling No. AAR/02(CE)/2007 dated 30/08/2007 under paragraph 11.1. it was held that burnt lime proposed to be used in the manufacture of steel and comprising of 94-96% of calcium oxide and permissible impurities, is more akin to the ‘separate chemically defined compound’-calcium oxide than to the mineral product lime in the crude state and would therefore merit classification as a metal oxide under 28259090 of chapter 28.
On a broader basis Authority stated that Quick Lime which is a less pure form of calcium oxide is more akin to mineral product lime, in a relatively crude form and will merit classification under chapter 25 and purer versions of quicklime with higher concentrations of calcium oxide would get classified as metal oxide under chapter 28.
- Observation by AAR
a) Manufacturing Process of Quick Lime and Slaked Lime:
- Quick Lime:-(Calcination) Lime Stone which is Calcium Carbonate (CaCo3) is heated in the lime kiln. Limestone decomposes into Quick Lime which is Calcium Oxide (Cao) and Carbon dioxide (Co2). This product contains 70 to 90% Calcium Oxide content and this is known as Quick Lime or Burnt Lime, and it is in lump form. The balance material is un-burnt Calcium Carbonate.
- Slaked Lime: This Quicklime is sprayed with water to give Slaked Lime, which contains Calcium Hydroxide (Ca (OH) 2), which is in powder form. This product is known as Slaked Lime / Hydrated Lime, which contains 70 to 90% Ca (OH)
b) Customs Tariff Code-Chapter-25:
Chapter 2522 of Customs Tariff covers Quicklime, Slaked Lime and Hydraulic Lime, Other Than Calcium Oxide and Hydroxide of Heading 2825 and CTH 2522 1000 covers Quick lime and CTH 25222000 covers slaked lime.
General Notes to HSN Explanatory Notes to Chapter 25 states:
Quicklime (an impure calcium oxide) is obtained by calcining limestone containing very little or no clay. It combines very rapidly with water, giving off considerable heat and producing slaked lime (calcium hydroxide). Slaked lime is usually employed for soil improvement or in the sugar industry.
Hydraulic lime is obtained by low temperature calcination of limestone containing sufficient clay (although usually less than 20 %) to ensure that the product sets under water. Hydraulic lime differs from natural cement in that it still contains appreciable amounts of uncombined quicklime, which may be slaked with water.
The heading excludes purified calcium oxide and calcium hydroxide (heading 28.25).
c) Customs Tariff Code-Chapter-28
Chapter 28 of Section VI of Customs Tariff covers Inorganic Chemicals, Organic or Inorganic Compounds of Precious Metals, Of Rare-Earth Metals, Of Radioactive Elements or Of Isotopes.
Chapter 2825 covers Hydrazine and Hydroxylamine and Their Inorganic Salts; Other Inorganic Bases, Other Metal Oxides, Hydroxides and Peroxides. CTH 28259040 covers Calcium Hydroxide and CTH 28259090 covers others.
Note 1 to Chapter 28 states:
NOTES: 1. except where the context otherwise requires, the headings of this Chapter apply only to: (a) separate chemical elements and separate chemically defined compounds, whether or not containing impurities; (b) the products mentioned in (a) above dissolved in water;
HSN Explanatory Notes to chapter heading 2825 states:-
(11) Calcium oxide, hydroxide and peroxide. This heading covers only the oxide (CaO) and the hydroxide (Ca(OH)2), in the pure state (i.e., containing practically no clay, iron oxide, manganese oxide, etc.), such as the product obtained by calcining precipitated calcium carbonate.
The heading also covers fused lime obtained by fusing ordinary quicklime in an electric furnace. This product has a high degree of purity (approximately 98 % calcium oxide); it is crystalline and generally colourless. It is used, in particular, for refractory linings for furnaces, in the manufacture of crucibles and for addition to concrete, in small pieces, to increase its resistance to wear.
Calcium peroxide (CaO2) is a white or yellowish powder, hydrated (usually with 8 H20), sparingly soluble in water. Used as a bactericide and as a detergent, in medicine and in the preparation of cosmetics.
Quicklime (calcium oxide) and slaked lime (calcium hydroxide) are excluded (heading 25.22).
d) Usage Test applied
According to Wikipedia, Calcium Oxide is in manufacturing of cement, paper, and high-grade steel, for medicinal purpose and insecticides. Calcium Hydroxide is used in food, paper industry and in water and sewage treatment plant. It is seen that purified forms of calcium oxide and calcium hydroxide having industrial applications with high purity, which is the case in hand here, are covered under CTH 28259090 for calcium oxide and CTH 28259040 for calcium hydroxide.
Applying the above, to the case at hand, we find from the manufacturing process and the requirement of the intended buyers, that goods to be supplied is industrial grade Calcium Hydroxide of high purity of 86% and industrial grade Calcium oxide of high purity of 86% are rightly classifiable under CTH 28259040 and CTH 28259090 respectively taxable at 9% CGST and 9% SGST as per entry sl.No.38 of Schedule III of Notification no. 01/2017-C.T.(Rate) dated 28.06.2017 as amended and G.O. (Ms) No. 62 dated 29.06.2017 No. II (2)/CTR/532(d-4)/2017 as amended respectively.
AAR seems to have based its decision on the basis that purity factor in excess of 70% merits that the product is having high purity. In the impugned case purity factor is 86%, therefore it would fall under the Chapter 28 being a Chemical rather than in Chapter 25 rather than quick lime or slaked lime.
It seems that there might be a case of reconsideration in the decision on account of non-consideration to the HSN Explanatory Note, Board Circular clarifying the HSN Explanatory Note, CESTAT Decision and missing out on the reason behind order of CBEC Authority for Advance Rulings, in the Ruling No. AAR/02(CE)/2007 dated 30/08/2007:
a) Explanatory Notes have to be followed while Interpreting Entry in GST Regime:
Explanation to Notification No. 1/2017-Central Tax Rate and 2/2017-Central Tax Rate is reproduced herewith:
(iii) “Tariff item”, “sub-heading” “heading” and “Chapter” shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).
(iv) The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification.
AAR Tamil Nadu in its own decision has clarified the binding nature of HSN Explanatiry Notes which is as follows:
5.2 In terms of explanation (iii) and (iv) to Notification No. 1/2017 -Central Tax (Rate) dt. 28-06-2017, tariff heading, sub-heading, heading and chapter shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 and the Rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975, including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall be applied for the interpretation and classification of goods. The Customs Tariff is aligned with HSN. In the above referred ruling, the discussion is based on Excise Tariff which is also aligned with HSN and therefore the observations/interpretations with respect to the Section Notes and chapter Notes holds in the current taxation of GST.
Therefore, Interpretation as per HSN Explanatory Notes has to be mandatory to be followed while interpreting the Entries.
b) CBEC Circular No. 18/91-CX.3, dated 10th July 1991 explaining Explanatory note to HSN 2825 and the purity level required for Calcium Oxide to Fall under Chapter Heading 2825 rather than 2522:- The relevant Extract of the Circular which discussed the Explanatory notes to HSN for Tariff Heading 2825 is being reproduced herewith:
“HSN Explanatory note under Tariff Heading 28.25 also excludes Calcium Oxide which has purity less than 98% from Chapter 28 in view of the fact that what is covered under 28.25 is Calcium Oxide of purity 98%.”
Therefore, it can be clearly observed that Boards Circular clearly provided that for the purpose of falling under Chapter 2825, there has to be a purity level of 98% or more as Explanatory Notes to HSN itself provide that “This product has a high degree of purity (approximately 98 % calcium oxide)”.
c) CESTAT Ruling of Differentiation between Chapter Heading 2825 and 2522:
BANGLAORE Bench of CESTAT in the matter of Commissioner of Central Excise Shillong Vs Wood Craft Products Limited in their decision dated 26th May 2015
“5.8. the claim of the department is that Note 1 to Chapter 28 provides that separate chemically defined compounds, whether or not containing impurities are covered. However, this submission is not supported by HSN Explanatory Note reproduced above as well as the Boards Circular referred to an discussed above. What is covered by Chapter 28.25 is Calcium Oxide which of 98% purity or more. Admittedly in the case, the purity of the Burnt Lime is 70 to 75% only. Therefore, in view of the Boards Circular as well as HSN Explanatory Note, the product manufactured by the respondent ahs to be classified under CTH 25.05 only. “
A similar decision was also given in the matter of Commissioner of Central Excise, Hyderabad-III Vs Bhandari Minerals Private Limited.
Therefore, in the above decision as well, CESTAT after referring to the Boards Circular clearly held that what is covered by Chapter Heading 28.25 is Calcium Oxide which is of purity of 98% or more. Therefore, if the purity level of the product is lesser than 98%, such product would not be falling under Tariff 2825 rather it would fall under 2522.
d) CBEC Authority for Advance Rulings, in the Ruling No. AAR/02(CE)/2007 dated 30/08/2007: Para 4 and Para 5 of Ruling by Chairman “Pv Reddi”:
AAR Tamil Nadu seems to have missed out on the relevant extract reproduced herein below, which provided the gist of the decision:
- Wikipedia (the free Encyclopedia) refers to the fact that calcium oxide is “commonly known as burnt lime, caustic lime or quick lime”. The applicant also states that burnt lime is otherwise known as Quick lime. In Encyclopedia of Chemical Technology by Kirk-Othmer, it is stated that the component of calcium oxide ranges between 93.25 and 98% in “Commercial quick limes”.
“4. Thus we have quick lime in Chapter 25 and calcium oxide in Chapter 28. As already noted, quick lime is a common name for calcium oxide. The overlapping commodities with interchangeable nomenclature are thus placed in two separate chapters. Quick lime suffers no duty at present whereas calcium oxide attracts duty at 16%. Then, how to understand these apparently similar items? Where and how to draw the dividing line between the two? That is the puzzling question before us. The only solution seems to be to distinguish them from the stand point of the degree of purity and their uses.
- Burnt lime containing practically nothing but calcium oxide with negligible quantities of impurities such as clay remaining in it and which is utilized for sophisticated industrial uses ought to be classified under the heading 2825 (T.I. 2825 90 90). In the case of applicant’s product, the calcium oxide content is said to be as high as 95%. It may not be the calcium oxide in purest form, which is not known to be manufactured in our country. Yet, the product burnt lime to be manufactured by the applicant is calcium oxide with little or negligible impurities. It can be legitimately classified as calcium oxide under Heading 2825 as it is almost pure. When we are called upon to distinguish calcium oxide from quick lime, this type of product which contains the calcium oxide – an inorganic compound, in almost pure state, should be relegated to Heading 2825.”
- This is perhaps a rare case in which the applicant has come forward to pay duty for its product under Tariff Item 2825 90 90 instead of claiming duty relief available for quick lime. Apparently, the applicant being convinced of the correct classification, would like to avert the risk of availing the benefit on the strength of decisions rendered in a different context and then facing a backlash at a later stage.
The important issue highlighted in the above para was that degree of purity would distinguish between Quick Lime and Chemical and further calcium oxide in purest form is not known to be manufactured in our country. AAR then relied upon the submission of the applicant which is reproduced below:
“The applicant has already clarified by referring to HSN Notes that the impurities in their burnt lime fall within the category of permissible impurities.”
The product of applicant did not pass the requisite purity level of 98% and AAR themselves admitted that product of such purity is not manufactured in India. However, applicant himself contended that purities in his product are within permissible range and AAR themselves acknowledging the instant case is “rare case in which the applicant has come forward to pay duty for its product under Tariff Item 2825 90 90 instead of claiming duty relief available for quick lime” held that product burnt lime to be manufactured by the applicant which is approximately 95% pure in its form is calcium oxide with little or negligible impurities.
AAR Tamil Nadu has also provided that the intended use of the product is for water treatment plants, therefore only highly pure lime can be used in water treatment plants, therefore its more of a chemical rather than Quick/Slaked Lime. It is not at all warranted since the impugned entry is not use based entry and therefore user test cannot be applied while analysing the entry.
Comment: Explanatory Notes to HSN, Board’s Circular and CESTAT decision are very clear in this aspect and clearly hold that purity level less than 98% of Calcium Oxide merits classification under Chapter Heading 2522 rather than 2825. Further, decision of CBEC Authority for Advance Rulings, in Ruling No. AAR/02(CE)/2007 dated 30/08/2007 has to be read in reference to the specific contention of the applicant that Purity level was as high as 95% whereas in the case of before AAR Tamil Nadu, Calcium Oxide with a purity level of 70-90% have also been held to be falling under 2825.