Commissioner Central Excise and Service Tax Vadodara-II v. Gail (India) Ltd.

(Krishna Murari and S. Ravindra Bhat, JJ.)

Civil Appeal No. 8946-8949/2022, decided on November 24, 2022

Commissioner Central Excise and Service Tax Vadodara-II ________________________________________________ Appellant;

v.

Gail (India) Ltd. __________________________________ Respondent.

With

Civil Appeal No. 8950/2022

Civil Appeal No. 8951/2022

Civil Appeal No. 8952-8955/2022

Civil Appeal No. 8946-8949/2022; Civil Appeal No. 8946-8949/2022; Civil Appeal No. 8950/2022; Civil Appeal No. 8951/2022; and Civil Appeal No. 8952-8955/2022

The Order of the court was delivered by

Order

1. This matter came up for hearing on 24.11.2022, wherein the following order was passed:

“Delay condoned in Civil Appeal Diary No(s). 13865/2020, 14994/2020, 15825/2020 and 15335/2020.

The Civil appeals are dismissed.

Reasons to follow.”

2. In these appeals under Section 35L of the Central Excise Act, 1944, the Commissioner of Central Excise, Vadodara (hereafter “Revenue”) is aggrieved by a common order¹ by the Central Excise and Service Tax Appellate Tribunal (hereafter “CESTAT”). The Revenue complains that the impugned order is in error as it reverses the determination by the concerned Commissioner of Central Excise with regard to the product of the respondent (hereafter “GAIL”). The Revenue urges that the classification of GAIL’s product by the Commissioner is the correct one. The connected appeals, challenge similar orders² of the CESTAT.

3. GAIL engages in the manufacture of liquified petroleum gas (“LPG”) and mixed fuel oil (“MFO”). Both products are classifiable under Chapter 27 of the First Schedule to the Central Excise Tariff Act, 1985 (hereafter, “CETA”). GAIL used to file monthly returns with the Central Excise authorities and paid 16% ad valorem duty for clearing its product, i.e., MFO under CTA 2710.99/27101990. The Revenue, alleging misdeclaration, commenced investigation which ultimately resulted in Show Cause Notices (“SCN”) for three periods. In these, it was alleged that pursuant to examination and the report of the Chemical Examiner, a copy of which was made available to GAIL, MFO was properly classifiable under Tariff Item 27101119 and not under 27101990. SCNs were issued for various periods³. After hearing GAIL, the SCNs were confirmed by the adjudicating Commissioner who held firstly that the sample in question was found to distill 90% of volume at a temperature of 210° C and was therefore, correctly classifiable as “light oil preparations”, and secondly, it was held that the sample satisfied supplementary note (a) to Chapter 27. It was also held that the sample was practically distilled with respect to suitability as fuel in spark ignition engine and complied with that requirement too. Based on these findings, the Commissioner held that the MFO was classifiable as motor spirit by virtue of supplementary note to Chapter 27 of the CETA 27101119.

4. GAIL was aggrieved by the orders of the Commissioner and appealed to the CESTAT. The revenue too had preferred appeals against the Commissioner’s orders limited to the question of enhancement of penalty. By the impugned order, the CESTAT found that firstly to qualify the description suitable for use as motor spirit, the product had to be distilled in admixture with anything other than mineral oil. The CESTAT found that the letter dated 24.02.2006 suggested that the product has been distilled in admixture with motor gasoline in the ratio of 10% V/V. It was secondly held that the product had not been distilled for use in admixture in any substance other than mineral oil and lastly that relevant findings had not been produced by the revenue to support its classification.

5. Mr. Rupesh Kumar, on behalf of the Revenue, urged that CESTAT fell into error in holding that the MFO in the present case was classifiable under tariff heading 27101119 and Chapter 27 CETA. He juxtaposed the various entries and sub-entries under the Chapter 27, falling under the heading “petroleum oils”, and oils obtained from petroleum materials other than crude preparations had specified or included containing 70% or more of petroleum oils obtained from butane. These oils were basic constituents of the preparation. Learned counsel stressed upon the Supplementary note (a) which reads as under:

“SUPPLEMENTARY NOTE: In this Chapter, the following expressions have the meanings hereby assigned to them.

(a) “motor spirit” means any hydrocarbon oil (excluding crude mineral oil) which has its flash point below 25°C and which either by itself or in admixture with any other substance, is suitable for use as fuel in spark ignition engines. “Special boiling point spirits (tariff item Nos. 2710 12 11, 2710 12 12 and 2710 12 13)” means light oils, as defined in Sub-heading Note 4, not containing any anti-knock preparations, and with a difference of not more than 60°C between the temperatures at which 5% and 90% by volume (including losses) distil;..”

6. The revenue also relied upon the Chemical Examiner’s test report, especially his letter dated 28.04.2006 and letter dated 17.10.2006 and contended that the sample distilled 90% by volume at 165°C, i.e., below 210°C, meeting the definition of light oil preparations, in CETA Chapter sub-heading supplementary note (a). It was submitted that having regard to these circumstances, the determination of the Commissioner was correct and CESTAT ought not to have disturbed it.

7. Ms. Charanya Lakshmikumaran, learned counsel appearing for GAIL urged firstly that being the final judicial authority, CESTAT’s decision regarding the proper classification should not be disturbed. In this regard, reliance was placed on Union of India v. Controls & Switch Gears⁴ and Steel Authority of India Ltd v. Designated Authority⁵. It was submitted that in the decision in Steel Authority, it was held that this court would not redetermine facts in exercise of its appellate jurisdiction under Section 35L. Learned counsel urged therefore that without establishing perversity or reasoning completely contrary to the facts, interference with CESTAT is not called for.

8. It was next urged that the contents of Chapter heading 2710, despite its amendment in 2005, especially with respect to definition of “motor spirit” have remained the same over the years. Learned counsel emphasized that to classify a product as MFO, the Revenue has to establish that it satisfies the definition of Motor Spirit under 2710 or the supplementary note (a) to Chapter 27. Under that note motor spirit means any hydrocarbon oil (excluding crude motor oil) which has its flash point below 25° C and that it admixtures. Therefore, to classify the disputed product as motor fuel, the twin conditions have to be proved, i.e., that (a) the product has a flashpoint below 25° C and (b) the product by itself or admixture with any other substance is useful as fuel in a spark engine.

9. It was argued that the product was examined by the Chemical Examiner whose report noted that the flashpoint was less than 25° C. That report significantly stated that the Research Octave Number (RON) of admixture of the sample with the motor gasoline was found to be 89.6. This formed the basis of the conclusion that the sample had the characteristic of the motor spirit and was stated in the letter dated 17.10.2006. Learned counsel submitted that the product in question has to be tested in admixture with any substance other than hydrocarbon oil – in accordance with the supplementary note (a) to Chapter 27. In this regard, reliance was placed upon CESTAT decision in Oil India Limited v. CCE⁶. It was argued therefore, that in the present case, the sample was mixed with motor gasoline, which does not conform to the description “any other substance”. The Revenue could not establish that the product was suitable for use as fuel in spark ignition engine for the simple reason that the mixture of the product was mixed with motor spirit and therefore, the admixture was motor spirt. In the circumstances, the reliance upon the test report was not warranted. Reliance was also placed upon the decision in Indian Oil Corporation v. Collector of Central Excise⁷.

Analysis and reasoning

10. Before proceeding with the discussion of the rival merits of the issue, it would be necessary to extract the rival tariff entries which are as follows:

“2710 Petroleum oils and oils obtained from bituminous minerals, other than crude; preparations not elsewhere specified or included, containing by weight 70% or more of petroleum oils or of oils obtained from bituminous minerals, these oils being the basic constituents of the preparations; waste oils

– Petroleum oils and oils obtained from bituminous minerals (other than crude) and preparations not elsewhere specified or included, containing by weight 70% or more of petroleum oils or of oils obtained from bituminous minerals, these oils being the basic constituents of the preparations, other than waste oils:

2710 11 — Light oils and preparations:

Motor Spirit:

2710 11 11 Special boiling point spirits (other than benzene, toluol) with nominal boiling point range 55-115 degree Celsius kg. [16% + Rs. 15.00 per litre]

2710 11 12 Special boiling point spirits (other than benzene, benzol, toluene and toluol) with nominal boiling point range 63- 70-degree Celsius kg. [16% + Rs. 15.00 per litre]

2710 11 13 —- Other special boiling point spirits (other than benzene, benzol, toluene and toluol) kg. [16% + Rs. 15.00 per litre]

2710 11 19 Other kg. [16% + Rs. 15.00 per litre]

2710 11 20 —- Natural gasoline liquid (NGL) kg. [ 16% + Rs. 15.00 per litre]

2710 11 90 Other kg. [16% + Rs. 15.00 per litre]

2710 19 — Other :

2710 19 10 Superior kerosine oil (SKO) kg. 16%

2710 19 20 — Aviation turbine fuel (ATF) kg. 16%

2710 19 30 — High Speed diesel (HSD) [ kg. 16% + Rs. 5.00 per litre]

2710 19 40 — Light diesel oil (LDO) [kg. 16% + Rs. 5.00 per litre]

2710 19 50 — Fuel oil kg. 16%

2710 19 60 Base oil kg. 16%

2710 19 70 — Jute batching oil and textile oil kg. 16%

2710 19 80 Lubricating oil kg. 16%

2710 19 90 Other kg. 16%

— Waste oil:

2710 91 00

Containing polychlorinated kg. # biphenyls (PCBs), polychlorinated terphenyls (PCTs) or polybrominated biphenyls (PBBs)

2710 99 00 — Other kg. #

2711 Petroleum gases and other gaseous hydrocarbons

— Liquified:

2711 11 00 — Natural gas kg. 16%

2711 12 00 — Propane kg. 16%

2711 13 00 — Butane kg. 16%

2711 14 00 — Ethylene, propylene, butylene and butadiene kg. 16%

2711 19 00 — Other

— In gaseous state:

2711 21 00 — Natural gas kg. 16%

2711 00 — Other kg. 16%”

11. It is evident from the rival contentions, that the competing entries are “other” “motor spirits”- urged by the Revenue (TI 2710.11.19) whereas the other entry is “2710 19 90 — Other”. Now, since both tariff entries fall within Chapter 2710, the chapter notes are an internal guide to their interpretation. Supplementary note (a), therefore holds the key to interpretation; it states that “motor spirit” means any hydrocarbon oil (excluding crude mineral oil) which has its flash point below 25°C and which either by itself or in admixture with any other substance, is suitable for use as fuel in spark ignition engines.” Therefore, any product, to qualify under the broad rubric of “motor spirit” should be

(a) a hydrocarbon oil excluding crude mineral oil;

(b) which has a flash point below 25°C and

(c) which by itself, or in admixture with any other substance, is suitable for use as a fuel in spark ignition engines.

12. A plain reading of the note would reveal that all the ingredients have to be satisfied. It is not sufficient if the product is a hydrocarbon oil or that it has a flash point below 25°C; it should qualify both conditions, and also fulfil the last condition that by itself, or in admixture with any other substance should be suitable for use as fuel in spark ignition engines. It is crucial that the admixture should be with any other substance. The use of the term “other” is significant because it is meant to exclude the reference to a class of oils, i.e., hydrocarbon oil.

13. In the present case, this court finds merit in the GAIL’s argument, which was accepted by the CESTAT, which is that the Chemical Examiner’s report clearly revealed that the MFO was not mixed with any “other” substance; it was mixed with motor gasoline.

14. In Oil India Limited (supra) it was held that:

“In view of the Board’s clarification dated 17.11.81 the Revenue cannot take up a contention that condensate will not come under Item 68 of the old Tariff The above clarification further makes it clear that condensate is a petroleum in natural state and is crude oil. It is to be classified as crude mineral oil. If that be so, it would directly come under sub-heading 2709.00 which takes in petroleum oils and oils obtained from bituminous materials and crude. When we examine the Heading 2710 we find that the main heading makes a specific exclusion of crude. If that the so, there is no merit in the contention that because of an exclusion clause provided under Motor Spirit, condensate has to undergo a test of flash point and use as a fuel in spark ignition engine for being excluded from the Heading 2710. Since the main heading itself excludes crude, it cannot be taken that subsequent exclusion will bring it back under Heading 2710. There is also merit in the contention of the appellant that reference to admixture with any other substance is to be taken as substance other than mineral oil. The description under the heading ‘Motor Spirit’ tallies with the description under Item 6 in the old Tariff.”

15. The decision of CESTAT was affirmed by this court, which dismissed the Revenue’s appeal, in Commissioner of Central Excise v. Oil India Ltd⁸. In the present case too, there is no material to substantiate the revenue’s argument, that the product (MFO) conformed to the description of “other” motor oil which inter alia, was, after its admixture with any substance, other than hydrocarbon oil. On the contrary, the product was mixed with motor gasoline, which concededly is a hydrocarbon oil.

16. In view of the foregoing discussion, there is no merit in these appeals, which are dismissed without order on costs.

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¹ Final Order No. A/10013-10016/2019 dated 02.01.2019 in Appeal Nos. E/1104, 1369, 1417, 1737/2009.

² Final Order No. A/11113/2019 dated 05.07.2019 in Excise Appeal No. 73/2012; Final Order No. A/10442/2019 dated 27.02.2019 in Appeal No. E/925/2011; and Final Order No. A/10283/2019 dated 04.02.2019 in Appeal No. E/633/2010.

³ SCN dated 06.01.2007 for the period July 2004 to October 2008; SCNs dated 06.01.2007; 25.09.2007; 05.08.2008 and 02.04.2009 (for the periods July 2004 to October 2008); SCN dated 21.07.2009 (for the period November 2008 to May 2009); SCN dated 10.05.2010 (for the period June 2009 to March 2010) and SCN dated 04.04.2011 for the period April 2010 to October 2010.

⁴ 2011 (274) ELT (A) 109 (SC)

⁵ 2017 (349) ELT 193 (SC)

⁶ 2002 (148) ELT 802 (TRI-Del)

⁷ 1990 (45) ELT 134.

⁸ 2004 (170) ELT A 116 (SC)