Customs, Excise and Gold Tribunal - Delhi
Indian Petrochemicals Corporation ... vs Collector Of C. Ex. on 19 September, 1991
Equivalent citations: 1992(57)ELT485(TRI-DEL)
ORDER S.L. Peeran, Member (J)
1. The Collector of Cenral Excise, Baroda by his Order-in-Original No. 24/MP/90 dated 22-10-1990 has passed the following final order:
(1) confirmed duty demand of Rs. 24,41,99,988.77 (Rupees twenty-four crores forty-one lakhs ninety-nine thousand nine hundred eighty-eight and paise seventy-seven only) on the quantity of 107786.895 KL at 15°C of Raw Naphtha obtained from IOC Refinery at concessional rate under Notification No. 27/89 dated 1-3-1989 but utilised for manufacture of petroleum resins which is not a product specified in the said notification during the period 1-10-1989 to 31-8-1990 under Rule 196 of the Central Excise Rules, 1944.
(2) ordered confiscation of land, building, plant and machinery etc. used in connection with manufacture, production, storage and removal or disposal of the said goods under Sub-rule (2) of Rule 173Q of the Central Excise Rules, 1944. However, an option to redeem on payment of rupees one lakh was given.
(3) imposed penalty of Rs. 5 crores (rupees five crores) under Rule 173Q(a), (b), (d) of Central Excise Rules, 1944.
2. The appellants are engaged in the manufacture of, among other products, Ethylene, Propylene, Butadine, Benzene, and Carbon Black Feed Stock falling under Chapter 27 and 29 of Central Excise Tariff Act, 1985. They also manufacture Petroleum Resins falling under Heading No. 3911.10 of Central Excise Tariff Act, 1985.
3. The departmental officers during the course of inspection found several contraventions of the excise rules and found the appellants had by suppression, by reason of fraud, wilful misstatement obtained Raw Naphtha at concessional rate of duty under Notification No. 75/84-C.E., dated 1-3-1984 as amended by Notification No. 27/89-C.E., dated 1-3-1989. It was found that the appellants had manufactured goods other than those mentioned in their AL-6 application in violation of the terms and conditions of the concession granted to them and of the L-6 licence obtained by them. It was also found that large scale duty evasion had been done by wilfully making false statements in the applications for concession made by them under Rule 192 of Central Excise Rules, 1944. Therefore, the Department issued a Show Cause Notice dated 9-1-1990 alleging contravention of provisions of Rule 192, 194 and 196 of Central Excise Rules, 1944 read with proviso to Section 11A of the Central Excises and Salt Act, 1944 and also they were called upon to show cause as to why land, building, plant and machinery should not be confiscated and penalty should not be imposed on them under Rule 173Q of the Central Excise Rules, 1944.
4. It was alleged in the Show Cause Notice that the officers studied the process of manufacture vis-a-vis the provisions of aforesaid notifications. On such observation, it was alleged, that the officers observed that Raw Naphtha, so obtained on concessional rate under L-6 Licence was mixed with dilution stream and cracked at a very high temperature (which is known as thermal cracking). During this process, Naphtha is converted into Olefinic Rich gases and Carbon Black Feed Stock; that the said olefinic gases were compressed and fractionated into Ethylene, Propylene, Mixed C4 and Pyrolysis Gasoline. This pyrolysis gasoline is partly sent to petroleum resin plant as feed stock for the manufacture of Petroleum Resins and the other part, after removing lighter gases, is used in the manufacture of Benzene, and the residual Raw Naphtha/Pyrolysis Gasoline, C5 and C7 stream emerging after processing is returned to Gujarat Refinery as Naphtha Return stream. It was, therefore, alleged in Show Cause Notice that petroleum resins so manufactured out of Raw Naphtha through Pyrolysis Gasoline was not covered by Notification No. 75/84 dated 1-3-1984 as amended and also Notification No. 27/89 dated 1-3-1989. It was alleged that Raw Naphtha used in the manufacture of petroleum resins was not used for the purpose and in the manner stated in their application for obtaining L6 licence.The investigating officers obtained the statements of Shri S. Sarkar, Deputy Production Manager, Shri U.M.R. Bhatt, Production Manager and of Shri S.S. Bhat-hagar, Deputy Manager of Excise and Customs and the same were also relied in the Show Cause Notice.
5. In their reply dated 12-4-1990, the appellants contended inter alia -
"(a) IPCL is drawing Raw Naphtha under Notification No. 75/84 and subsequently under 27/89 for production of products listed in the above notifications. Necessary A.L. 6 was filed, L6 obtained, RG 16 maintained and R.T. 11 submitted. In the A.L. 4 application filed in 1986 for consolidated issue of L4 licence, IPCL has mentioned Pyrolysis Gasolene as one of the products obtained. In the A.L. 6 application dated 11-7-1977, which was referred to as original A.L. 6 in the subsequent A.L. 6s, it was clearly mentioned that Pyrolytic BT Rich stream was one of the inevitable concomitants of the cracking process.
(b) Pyrolysis Gasolene is one of the by-products obtained during the cracking of Raw Naphtha taken in terms of the aforesaid notification. From the Pyrolysis Gasolene both Benzene and Toluene are produced and isolated. Both Benzene and Toluene are products listed in the notification. Thus, the Raw Naphtha taken for use under Notification No. 75/84 and 27/89 was made use of for the manufacture of products listed in the notification. After stripping of Benzene and Toluene, the Pyrolysis Gasolene Residue left over is definitely a product which was incidental and unavoidable in the process of manufacture of Benzene and Toluene. Therefore the production of Pyrolysis Gasolene and the residue after stripping of Benzene and Toluene are incidental to the manufacture of Benzene and Toluene and therefore the Naphtha utilised in that process is fully eligible for exemption in terms of Notification No. 75/84 and 27/89. The production of Pyrolysis Gasolene or the residual one does not in any way contravene the condition of Notification No. 75/84 and 27/89.
(c) As explained in different statements to the Investigating Officer, the Pyrolysis Gasolene Residue after stripping of Benzene and Toluene is used to be sent as part of the Return Stream to the Refinery. However, a portion of the residual stream is being used in the Resin Plant for polymerisation. There is no doubt that the residual Pyrolysis Gasolene Stream continues to fall under Chapter Heading No. 27 of the Central Excise Tariff Schedule. This, being captively used for production of Petroleum Resins, is covered by Notification No. 276/67 and Notification No. 28/89 which authorises captive consumption of products falling under Chapter 27 for subsequent manufacture of any goods. Thus, the residual pyrolysis gasolene gets exempted from excise duty used in the production of Petroleum Resins and there is no duty liability. We are paying Central Excise duty on Petroleum Resins under Chapter Heading No. 3911."
6. (a) The learned Collector after granting a personal hearing rejected the various contentions raised by the appellants and confirmed the order. The learned Collector has held that pyrolysis gasolene cannot be diverted for manufacture of products not specified in the notification. He has held that return stream of raw naphtha sent back to the refinery cannot be considered as goods produced or manufactured by M/s. IPCL because it is only a return stream of raw naphtha, as provided in Explanation I to Notification 27/89 and hence taking benefit of Notification No. 28/89 dated 1-3-1989 as amended, for utilising the return stream of raw naphtha for manufacture of Petroleum Resin is totally inadmissible and amounts to misconception of notification and such an interpretation would vitiate the very purpose of Notification No. 27/89.
(b) The learned Collector has held that raw naphtha brought for use in the manufacture of products specified in Notification No. 27/89-C.E. and after such use the residual naphtha was required to be returned to the IOC's refinery in terms of Explanation I contained in the said notification. If any stream of such naphtha was used in the manufacture of products not specified in the aforesaid notification, M/s. IPCL would forfeit the concession on Raw Naphtha enshrined in Notification No. 27/89-C.E. He held that if pyrolysis gasolene emerging from such Raw Naphtha is used in any stage in the manufacture of Petroleum Resins (which are not specified under Notification No. 27/89 would become inadmissible). He further held that Petroleum Resin is a product not specified in the Notification No. 27/89-C.E., dated 1-3-1989 and as such not eligible for concessional rate of duty. He further held that M/s. IPCL has deliberately, wilfully, and intentionally used raw naphtha for the purpose of manufacture of petroleum resins, in contravention of the provisions of the said notification and by suppressing, misstating those facts from the Department, then they would not be entitled for any benefit of the concessional rate of duty. He further held that if raw naphtha was to be brought for use in the manufacture of petroleum resins, then M/s. IPCL was required to pay full duty on the raw naphtha so produced from IOC.
(c) The learned Collector has further held that assuming but not admitting that such quantities of raw naphtha which were returned after the manufacture of petroleum resins, were taken into account of IOC and thereafter discharged by following the prescribed Central Excise procedures, yet it is still totally irrelevant to the issue on hand because as in Central Excise laws there are specific provisions for return of duty paid goods and its accountal thereof. He held that unless return of duty paid goods takes place strictly in the manner as provided for the Central Excise Rules (Rule 173H & L) and hence no cognisance could be taken of such returned quantities, which appeared from the statement of Shri Bhatt, Production Manager. He held that the procedure stipulated in Notification No. 27/89-C.E. was required to be interpreted strictly only for the limited purpose of manufacture of the specified items mentioned therein. He held that as far as use of Raw Naphtha in the manufacture of Petroleum Resins is concerned, it is amply clear that there is no provision for bringing Raw Naphtha under concessional rate and for returning the unutilised quantity after such manufacture just as it is possible to do the same in respect of the specified items in Notification No. 27/89-C.E. Hence he held that the quantity of 107786.895 KL of Pyrolysis Gasolene classifiable as 'Raw Naphtha' was utilised for manufacture of petroleum resins, not specified in Notification No. 27/89-C.E., dated 1-3-1989 and hence he held that they were required to pay at full rate of duty instead of concessional rate specified in the said Notification No. 27/89 and hence differential duty of Rs. 24,41,99,988.77 P. was required to be paid by them.
7. The appellants in their appeal have summarised their submissions in para 14 of their Appeal Memo as follows :
"(a) Raw Naphtha drawn from the Refinery by the appellants in terms of Notification No. 27/89-C.E., dated 1-3-1989 is fully utilised for production of specified goods listed in the Notification. No Raw Naphtha drawn from the Refinery is diverted for any purpose since it is totally subjected to the cracking process;
(b) Pyrolysis Gasolene forming one of the products of Thermal Cracking is utilised for manufacture of Benzene and Toluene in two areas viz. KBH Plant and Resin Plant;
(c) With the separation of Benzene and Toluene from the Pyrolysis Gasolene, the obligation cast on the Appellants by the provisions of Notification No. 27/89-C.E., dated 1-3-1989 is fully discharged;
(d) The residue left after the separation of Benzene and Toluene is a product emanating inevitably in the total process of cracking and isolation of these specified goods;
(e) This residue is covered by Explanation 2 to Notification No. 27/89-C.E., dated ]-3-1989 and hence not chargeable to duty;
(f) There is no obligation on the part of the appellants to return all the residues as 'Return Stream' to the Refinery;
(g) C. 8/C. 9 Cut is recovered from the Residue left after separation of Benzene and Toluene and this is used for the manufacture of Petroleum Resins;
(h) C.8/C. 9 Cut recovered from the Residue is a product falling under Chapter 27 of the Central Excise Tariff and its subsequent utilisation for manufacture of Petroleum Resin is covered by Notification No. 28/89-C.E., dated 1-3-1989;
(i) At no stage there is any suppression or mis-statement of facts relating to either the production of Pyrolysis Gasolene as one of the products emanating in the process of Thermal Cracking or to its subsequent utilisation. The reference in this regard may be made to A.L. 6 Application filed in 1977 and A.L. 4 Application filed in 1984;
(j) The conclusion reached by the Adjudicating Authority that Raw Naphtha has been diverted for manufacture of Petroleum Resins is not based on facts;
(k) The conclusion reached by the Adjudicating Authority that Pyrolysis Gasolene, being Raw Naphtha, has been diverted for manufacture of Petroleum Resins and to that extent Notification No. 27/89-C.E., dated 1-3-1989 has been violated is based on lack of proper appreciation of the technical processes involved and due to improper interpretation of the scope of the Notifications No. 27/89-C.E., dated 1-3-1989 and 28/89-C.E., dated 1-3-1989;
(1) The operations conducted by the Appellants in their factory involved in the drawal of Raw Naphtha from the Refinery are fully covered by the Notifications No. 27/89-C.E., dated 1-3-1989 and 28/89-C.E., dated 1-3-1989. And, therefore, there is no question of any duty liability on any portion of Pyrolysis Gasolene or Raw Naphtha;
(m) Since the records already filed with the Department (A.L. 6 and A.L. 4 Applications) indicate clearly the generation of Pyrolysis Gasolene as an intermediate product in the Thermal Cracking of Raw Naphtha and its subsequent utilisation for production of Benzene and Toluene and separation of C. 8/C. 9 Cut from the residue left after separation of Benzene and Toluene, there is no suppression of the facts so as to invoke any penal provisions of the Central Excise Act and Rules."
8. We have heard Shri Swaminathan, learned Consultant for the appellants and Smt. Vijay Zutshi, learned Chief Departmental Representative for the Revenue.
9. Shri T.S. Swaminathan, learned Consultant submitted that the learned Collector was not justified in denying the exemption of the Notification No. 75/84 dated 1-3-1984 as amended by Notification No. 27/89 dated 1-3-1989. He contended that in the process of manufacture other products would inevitably arise as by-products and merely because of it, the exemption cannot be denied. He contended that the Show Cause Notice did not invoke proviso to Section 11A of the Act but it could be gathered only by its contents and implications. However, the Department was not justified in invoking the proviso to Section 11A of the Act as there was no suppression in the case. The assessee had maintained RT 16. The details of receipt of Raw Naphtha and products manufactured had been noted in the register. RT 11 statement had also been submitted every month. With regard to the allegation that petroleum resin was not stated and details of it not entered in register, Shri Swaminathan contended that petroleum resin was not manufactured from Raw Naphtha but from residue arising from the products and listed items manufactured from Raw Naphtha. From the residue, 'C8 C9 Cut' was extracted, which goes for polymerization for petroleum resin. He contended that what was extracted from waste and residue cannot be said to have been manufactured from raw naphtha and the Department has no concern about it and no duty can be raised from such extraction of petroleum from wastes and residue. He contended that L-6 form submitted by assessee gives the details of this process (referred to page 56-58 of paper book) column 5, gives the details of manner of manufacture and it had been submitted in the year 1977. He referred to page 61 of paper-book and in Serial No. 8, the details of manufacture of petroleum resin from residue had been indicated. The L-4 licence dated 27-6-1984 at page 73-76 of paper-book at column 12 of page 76 was also pointed out to us, to show that the manufacture of petroleum resin was within the knowledge of the Department. He submitted that the process of manufacture was continuous. CT-2 certificate was issued by jurisdictional authority and it had been verified and signed by Superintendent before issue of L-6. He contended that Notification 28/89 is applicable to petroleum resin for which L-4 had been obtained and details furnished and hence the assessee had not concealed anything from the Department. He also referred to Ex. 6 at page 27 of paper-book, which is Order-in-Original 81/84 dated 29-9-1984 pertaining to the classification list of the same division and therefore the Department was fully aware of the assessee's activity and it had not been objected to also at any stage from 1984 onwards. The assessee had maintained registers for six years and it had been checked but objection had not been raised by the Department. He contended that even if there was removal at wastages-residue stage for manufacture of petroleum resin, even then it is duty free under Notification No. 28/89. He contended that Chapter X is not required for removal of resin and it is only RG-1 which had to be maintained. It was only a procedural requirement of verification and hence no misstatement or suppression can be alleged against the assessee.
10. He referred to Chart I and Chart II filed by assessee during hearing of the arguments which are enclosed herein as Annexures I and II.
11. Referring to Chart II, Shri Swaminathan, learned Consultant submitted that after extraction of 'C8 C9 Cut' from residue, the residue was sent back to the storage tank to be pumped back to the refinery. He contended that only l/5th of the residue was used for manufacture of petroleum resin while the duty had been demanded on the entire residue.
12. He filed before us a fresh calculation on the basis of residue used for manufacture of petroleum resin and contended that the duty demand would come only to Rs. 4.5 crores approx. and not Rs. 24 crores and odd as demanded in the Show Cause Notice. Even this demand would be time-barred as there was no suppression and the Department had not proved its charges relating thereto. He contended that there was no violation of Notification 276/67 or 27/89 or 28/89 and that the duty demanded was also not maintainable.
13. Shri Swaminathan, learned Consultant, contended that Raw Naphtha was totally cracked before residue and the question of withdrawal of concession did not arise. There was no naphtha left and hence the allegation that it was diverted was not sustainable. The Notification 27/89 had been complied with and what was done with residue left, after cracking of naphtha to obtain the listed items was no concern of the Department. Hence, the & allegation that Raw Naphtha was diverted for manufacture of petroleum resin was not at all correct.
14. He contended that after several items had been cracked and extracted from the raw naphtha, it no longer remained as raw naphtha and hence the learned Collector was not correct in presuming that the residue was also raw naphtha. He contended that there was no misuse of raw naphtha. He further contended that residue was covered by Explanation II of the Notification 27/89. He contended that there was no tax structure after residue and therefore it follows that Govt. had no intention to tax at this stage. He submitted that the learned Collector was wrong in coming to the conclusion and basing his findings on the statements given by Shri Bhatt, as well as Shri Bhatnagar. He assailed the findings as incorrect, illogical and perverse. He contended that the learned Collector had misconceived the Return Stream and findings were not correct arid so also the rulings relied on by him. He relied on the ruling rendered in the case of IOC Ltd. v. Collector of Central Excise, Madras as reported in 1991 (53) ELT 347.
15. Smt. Vijay Zutshi, learned Chief Departmental Representative replying to the arguments of appellants, submitted that there was no infirmity in the order of the learned Collector and it was not assailable. She submitted the product in question will not come within both the Notification 27/89 and 28/89. She submitted that proviso 'B' of Notification 28/89 will not apply to the instant case as the gas was not allowed to escape and the ultimate final product was also not gas but solid one. It is not used as fuel and it is also not utilised in the factory but it was a final product, which was cleared to consumers of various industries of paints, ink manufacturers etc. She submitted that pyrolysis gases have now been exempted under Notification 125/90 dated 2-7-1990 but prior to this date the product was not exempted and clarification has also been given to this extent.
16. She submitted that raw naphtha and synthetic naphtha are broad terms and in support of this contention she relied on its definitions as given in Petroleum Act, 1934. She also placed before us for consideration the definition of raw naphtha as given in Hawley's Condensed Chemical Dictionary Eleventh Edition appearing at page 806 and also relied on the extracts at page 67 Vol. X of McGraw Hill Encyclopedia of Science & Technology. The same are noted below :
"Naphtha, (benzin). CAS : 8030-30-6 (1) petroleum (petroleum ether). A general term applied to refined, partly refined, or unrefined petroleum products and liquid products of natural gas, not less than 10% of which destil below 347F (175C) and not less than 95% of which distil below 464F (240C) when subjected to distillation in accordance with the Standard Method of Test for Distillation of Gasoline, Naphtha, Kerosene, and Similar Petroleum Products (ASTM D86); fp-73C, bp 30-60C, flash p -57F (-50C), autoign temperature 550F (287C), d 0.6.
Hazard : Flammable, dangerous fire risk, explosive limits in air 1-6% Use : Source (by various cracking processes) of gasoline, special naphthas, petroleum chemicals, especially ethylene. Cracking for ethylene also produces propylene, butadine, pyrolysis gasoline, and fuel oil, source of synthetic natural gas. (a) VM & P (Varnish Makers and Painters) (petroleum spirits, petroleum thinner).
Any of a number of narrow-boiling range fractions of petroleum with bp of approximately 93-204C, according to the specific use; distillation range 119-143C, d 07543, bulk d 6.280 lb/gal. pour point approximately -70F (-56C), flash p (TCC) 20F (-6.6C), autoign temperature 450F (232C).
Hazard : Flammable, dangerous fire risk.
Use : Thinners in paints and varnish, (b) blending. A petroleum fraction with volatility similar to the higher boiling fractions of gasoline. It is used primarily in blending with natural gasoline to produce a finished gasoline of specified volatility, (c) Cleaners. A dry cleaning fluid derived from petroleum and similar to Stoddard solvent, but not necessarily meeting all its specifications, flash p. 100F (37.7C).
(2) coal-tar (a) heavy (high-flash naphtha). Properties: Deep amber to dark red liquid, a mixture of xylene and higher homologs, d 0.885-0.970, bp 160-220C (approximately 90% at 200C), flash p 100F (37.7C), evaporation 303 minutes.
Derivation : From coal-tar by fractional distillation.
Hazard : Moderate fire risk. Toxic by ingestion, inhalation, and skin absorption.
Use : Coumarone resins, solvent for asphalts, toad tars, pitches, etc. cleansing compositions, process engraving and lithography; rubber cements (solvent); naphtha soaps; manufacture of ethylene and acetic acid, (b) solvent (160 degree benzol).
Properties : A mixture of a small percentage of benzene and toluene and xylene and higher homologs from coal-tar, (a) Crude : dark straw-colored liquid, (b) refined : water-white liquid; d (a) 0.862-0.892, (b) 0.862-0.872; bp (a) approximately 160C (80%), (b) approximately 160C (90%); flash p (a) and (b) approximately 78F (25.5C) Derivation : From coal-tar by fractional distillation. Grade : Dark straw, water-white. Hazard : Flammable, dangerous fire risk.
Use : Solvent, xylene; cumene, nitrated, for incorporation in dynamite."
McGraw-Hill Encyclopedia of Science & Technology Vol. X Cyclic organic compounds. Up until 1910 the coal tar industry was the principal supplier of cyclic compound: benzene, toluene, xylene, and their derivatives (Fig. 4 Table 4) Petroleum then became the chief source of cyclic organic compounds except for naphthalene, a great deal of which was always derived from coal tar (Table 5).
Table 5. Cyclic petrochemicals ______________________________________________________________________________ Chemical Uses Benzene Styrene Glyclohexane Phenol Detergent alkylate Maleic anhydride Aniline DDT ______________________________________________________________________________ Toluene Dealkylation to benzene Solvents Toluene disoryanate Motor and aviation gasoline TNT ______________________________________________________________________________ Xylenes p. Xylene a. Xylene m. Xylene Solvents and miscellaneous chemicals.
Gasoline ______________________________________________________________________________ Ethyl benzene Styrene ______________________________________________________________________________ Gyclohexane Nylon Intermediates Nonnylon uses Gyclohexamane and adipic acid ______________________________________________________________________________ Napthalene Phthalic anhydride Insecticides B. Naphthol and mothballs Others ______________________________________________________________________________ Benzene, toluene, and xylenes are important high-octane compounds of gasoline. They are manufactured by catalytic reforming and recovered by distillation and extraction processes. Substantial quantities of toluene are hydrodealkylated to benzene. Figure 4 shows the more important of the cyclic derivatives. High polymers (plastics and resins, fibres, and elastomers) constitute the great bulk of the derivatives with end products including nylon, polyesters fibers and film, polystyrene, styrene butadiene rubber, epoxy resins, phenolic resins, and polyurethanes from isocyanates. See POLYMER.
Naphthenic acids are carboxylic acids of substituted cyclopentanes and cyclo-hexanes : they are present in crude oils. Commercial naphthenic acids lie in the molecular-weight range of 180-350. Owing to their oil solubility, naph-thenates of appropriate metals are used as paint driers, fungicides, and lubricant additives.
Cresylies (alkylphenols, cresylic acids and cresols) are made by refining byproduct tar acids from cake ovens or gas works, and by recovery from refinery waste streams containing petroleum acids. The lower-boiling fractions of cracked petroleum contain xylenols and smaller amounts of cresols, ethyphenols, trimethylphenols, and methylethylphenols, which are produced at higher cracking temperatures. Cresols are also made synthetically by methylation of phenol to produce meta-, para-, and ortho-cresols and 2, 6-xylenol. Their chief uses are in phenolic resins, wire-enamel solvents, phosphate esters, ore-flotation reagents, oil and gasoline additives, antioxidants, and metal cleaners. See CRESOL.
...
Petroleum processing.
The recovery and processing of various usable fractions from the complex crude oils. The usable fractions include gasoline, jet fuel, kerosine, fuel oil, asphalt, lubricating oils, and many others.
...
Crude oil is a mixture of many different hydrocarbon compounds of the paraffin type (wax compounds) and of the naphthalene type (asphalt compounds), making the chemistry of petroleum refining extremely complex. The refining processes can be grouped under three main headings : (1) separating the crude oils to isolate the desired products; (2) breaking the remaining large chemical compounds into smaller chemical compounds by cracking; (3) building desired product properties by chemical reactions, such as reforming, alkylation, and isomeriza-tion.
Refinery products, such as gasoline, kerosine, diesel oil, and others, are not pure chemical compounds but mixtures of chemical compounds. Some of the hydrocarbon compounds contained in gasoline are shown in Table 1, along with the individual specific gravities, molecular weights, and normal boiling points.
17. She also relied on the definition of 'Petroleum' as given in Section 2(a) of the Petroleum Act, 1934, which is extracted below:
"2. (a) 'petroleum' means any liquid hydrocarbon or mixture of hydrocarbons, and any inflammable mixture (liquid, viscous or solid) containing any liquid hydrocarbon;
(b) 'petroleum Class A' means petroleum having a flash-point below twenty-three degrees Centigrade;
(bb) 'petroleum' Class B' means petroleum having a flash-point of twenty-three degrees Centigrade and above but below sixty-five degrees Centigrade;
(bbb) 'petroleum Class C means petroleum having a flash-point of sixty-five degrees Centigrade and above but below ninety-three degrees Centigrade;"
18. She pointed out that the raw naphtha, which is not utilised is sent back to Gujarat Refinery. A part of the gasoline is taken to a distance of 1 KM and stored separately. Separate process is carried out for manufacture of the impugned product. She contended that it is not an incidental activity. She further stated that the assessee was manufacturing the impugned product with a catalyst and that they were purchasing catalyst of nearly Rs. 1. crore worth. The impugned product was a 'non-polymerised product' and the same did not find mention in the said notifications for grant of exemption. It being a resin and not a gas and therefore it cannot be considered as a product arising incidentally in the course of the manufacture of petroleum products listed in the notification. The impugned product was marketed in different grades to various manufacturers of Textiles & Painting industry and had a separate trade mark namely 'Patrez'. Each grade of the impugned product used for separate industry were as follows. 80A grade was utilised by Tyre industry; 90 by dye industry and 100 grade also by dye and other industries. Therefore, the assessee's contention that it arose from waste materials was not a correct proposition, as also the process of manufacture indicated that it was deliberately produced, removed and marketed with profits. She contended that the removal was under SRP and hence the burden of proving the benefit of the notification lay on the assessee, which had not been discharged in this case. She contended that what went back was not the concern of the Department but what was deliberately removed for manufacturing a product not listed in the notification was the concern of the Department and the assessee was therefore liable to pay full duty on raw naphtha. She submitted that the assessee were not within the four corners of L-6 licence.
19. Shri Swaminathan, learned Consultant, countering the arguments of learned CDR Smt. Vijay Zutshi, submitted that the Department had misunderstood the notification. He submitted that it was not mandatory to return the raw naphtha. He submitted that another assessee at Bombay was utilising the entire residue, even as a fuel and were enjoying the benefit of the Notification No. 28/89. The Department were admitting pyrogasolene as technological necessity and hence the manufacture of petroleum resin from left over residue should be considered for grant of exemption under the notification. He referred to the application filed on 27-6-1984 for grant of L-4 licence and pointed out that along with the said application ground plan, write up, flow chart and diagrams had also been filed and therefore the Department cannot be said to be unaware of the manufacturing activity. There was a separate Range Office with 1 Superintendent and 6 Inspectors and each Inspector was supervising items manufactured under respective chapter heads. Hence it was not open for the Department to allege suppression in the matter. He contended that raw naphtha in different forms could be considered as "new goods" and when petroleum resin has emerged it was goods and hence entitled to exemption of Notification 28/89.
20. We have carefully considered the submissions of both the sides, perused the records and the impugned order.
The main questions that arise for our consideration are -
(i) Is petroleum resin manufactured out of the part Pyrolysis Gasoline which is alleged to be diverted from main stream, entitled for the benefit of concessional rate of duty under Notification 75/84-C.E., dated 1-3-1984 as amended by Notification No. 27/89-C.E., dated 1-3-1989 and Notification 28/89 dated 1-3-1989 ?
(ii) Are the demands barred by time ?
(iii) If not, can the entire duty demanded be confirmed ?
(iv) Is the penalty of Rs. 5 crore under Rule 173Q of Central Excise Rules, 1944 justifiable?
21. The contention of the Revenue has been that raw naphtha which is so obtained is mixed with dilution steam and cracked at a very high temperature (which is known as thermal cracking). During this process, Naphtha is converted into olefinic rich gases and carbon Black Feed Stock; that the said olefinic gases are compressed and fractionated into ethylene, propylene, mixed C4 and pyrolysis gasoline. It is alleged that this pyrolysis gasoline is partly sent to Petroleum Resin plant as feed stock, for the manufacture of petroleum resins and the other part, after removing lighter gases, is used in the manufacture of Benzene and the residual raw naphtha, pyrolysis gasoline, C5 and C7 stream emerging after processing is returned to Gujarat Refinery as Naphtha Return Stream. The Department's case is that this petroleum resin so manufactured out of Raw Naphtha through pyrolysis gasoline is not covered by Notification No. 75/84-C.E., dated 1-3-1984 as amended by Notification 27/89-C.E., dated 1-3-1989 and thus raw naphtha used in the manufacture of petroleum resins was not used for the purpose of in the manner stated in their application for obtaining L-6 licence.
22. The appellant filed their application in form A.L. 6 dated 11-7-1977 for grant of licence to obtain without payment of duty or part of the CED leviable thereon, raw naphtha to be used by them in the manufacture of the following products -
1) Carbon Black Feed Stock
2) Ethylene
3) Ethyne
4) Propylene polymer grade
5) Propylene chemical grade
6) Benzene
7) Butadine
23. They have given a declaration in the said application that they would use raw naphtha only for the manufacture of the aforesaid commodities in the manner set out in the schedule appended to the application form and they will not put to any other use except with prior approval. In the column 5 and 6 of the said application, they have given the manner of manufacture and purpose to which manufactured products would be applied and in column 8 of the application they have given their remarks. The details of which are reproduced below :
"5. Manner of Manufacture Naphtha with dilution steam is cracked at high temperature in the heaters. Thereafter the effluent is quenched and hot fractionated. Process resultants at this stage are (a) CBFS (b) Fuel oil (c) Pyrolytic BF rich stream (d) elofinic rich gas, Pyrolytic BT rich stream is hydrogenated and further processed for extraction of Benzene. The concomitant resultant of hydrogenation and Benzene extraction are the 07 and 06 raffinate stream which are returned to the refinery.
The Olefinic rich gas is compressed and subjected to separation processes. The yields are (a) ethylene (b) ethene (c) propylene - polymer grade (d) propylene-chemical grade. The concomitant resultants of the separation processes are mixed C4, Fuel Gas and C5 Rich Gas. Mixed C4 is further processed for Butadine extraction. The concomitant resultant C4 raffinate is used as fuel for the heaters. C8 Rich gas is utilised for the hydrogenation process pertaining; to Benzene Extraction and after the hydrogen is used up the balance is used as fuel gas for the heaters.
Ethene from the separation processes is used for the production of ethylene glycol. The remaining ethene rich stream is recycled back for the production of ethylene."
"6. Purpose to which manufactured product is applied.
1) Carbon Black Feed Stock - For sale
2) Ethylene - Will be used in the Complex for the manufacture of Low Density Polyethylene, Ethylene Oxide and Ethylene Glycol. (Ethylene is an intermediate product for the complex).
3) Ethene - Will be used in the production of Ethylene Oxide and Ethylene Glycol.(Intermediate product).
4) Propylene polymer grade - Will be used for the manufacture of propylene and poly-propylene in the complex (Intermediate product).
5) Propylene chemical grade - Will be used for manufacture of Acrylonitrile in the complex (Propylene chemical grade is an intermediate product).
6) Benzene - Will be used in the complex for manufacture of Detergent Alkylate and Polybutadine Rubber and to be sold to customers.
7) Butadiene - Will be used for manufacture of polybutadiene Rubber within the complex."
"8. Remarks - Since we propose to draw raw naphtha by 15th July, 1977, we request that the application may kindly be processed early. As indicated in the process description, fuel oil pyrolatic BT rich steam, hydrogenation rich gas, mixed C4 and ethene are inevitable concomitants of the cracking process in the Olofine Project. They are therefore either used as fuel or subjected to further process for extraction of Benzene & Butadiene."
24. As can be seen from the details of the said application form for grant of L-6, there is no indication of manufacture of petroleum resin but in the remarks column as noted above they have stated that fuel oil pyrolatic BT rich stream, hydrogenation rich gas, mixed C4 and ethene are inevitable concomitants of the cracking process in the olefine project and that it would either be used as fuel or subjected to further process for extraction of Benzene and Butadiene. There is also no indication of emergence of pyrolysis gasoline and its part diversion for manufacture of petroleum resin or that it emerges as an incidental, inevitable or involuntary to the process of manufacture of the said products in the course of manufacture of final products listed in the Schedule to the application.
25. They submitted an application dated 16-12-1986 for grant of one general C.E. Licence in Form 4 and in SI. No. 6 in Schedule 65, they have indicated Tariff Item No. 3911.90 petroleum resin. On 27-6-1984 they have sent another letter to the Superintendent seeking L-4 licence to manufacture petroleum resin. Along with the said application, they have filed process of manufacture, with process flow chart and also lay-out plan.
26. The contents of the letter from para 2 are reproduced below:
"Petroleum resins are low molecular weight (800 to 1000) organic materials having 8-10 repeat units in total. These are essentially aligomeric materials. They are mixtures of aligomers having some or different monomers units/or a mixture. These materials have softening points (65°C to 140° C by K.S. DIN 53180) like other low molecular materials. The malt viscosity of petroleum resins is so low that when melted they behave like fluids. In this respect, they are similar to waxes. The melt has no strength by virtue of which conventional methods of processing of plastics cannot be used. Under a stress they do not behave as plastic material nor a material made out of petroleum resins can be deformed continuously and permanently without rupture upon applying force greater than the yield value.
We have also got sample of petroleum resins tested and we furnish herewith copy of opinion given by Dr. R.A. Meshelkar, Deputy Director and Head, Division of Chemical Engineering, National Chemical Laboratory, Pune and opinion of Dr. S.A. Patel, Hon. Professor of Sardar Patel University, Vallabh Vidyanagar which establish it beyond doubt that the petroleum resins do not have any characteristic of plastic.
The major end-use sectors for these resins to start with would be Paint Sector & Rubber Sector. In the paint sector, such Hydrocarbon resins are used for manufacture of various kinds of points to improve their preparation in respect of:
- Resistance to water
- Resistance to Acids and Alkyds
- As an extender resin to cheapen down the cost
- Single pack aluminium paints
- Anti-corrosive paints, etc. Petroleum Resins are mostly used in blends with other resins such as Ester Gum, Alkyds, etc. In rubber sector, Petroleum Resins are mostly employed as a Tackifier. Petroleum Resins would be replacing Conmorene-Indent went resin currently used.
We therefore request that the petroleum resins are classifiable under T.I. 68-CET."
27. In their application dated 7-10-1976 in Form A.L. 4 for grant of licence to manufacture of Petroleum Resins of various grades, they have indicated in Column 12 which deals with particulars of each kind of raw materials to be used in each manufacture, they have given the following details -
1. Pyrolysis Gasoline
2. BF-3 (Catalyst + Plain Water (Co-catalyst)
3. Caustic Soda
4. Polymer inhibitor
5. Filter Aids.
28. The appellants have not indicated that raw naphtha is the input for the manufacture of petroleum resin but mentioned pyrolysis gasoline as an input. It is the defence of the appellants that raw naphtha is fully utilised on manufacture of pyrolysis gasoline and unused is also sent back in return stream. Only a part of pyrolysis gasoline is used as an input for manufacture of petroleum resin and even here the residue of petroleum resin is pumped back to the return stream. Their defence is that the part of petroleum gasoline utilised for manufacture of petroleum resin was only a residue and what has emerged from residue is not the concern of Department. However, they contend that it is a new goods emerging and hence Notification 28/89-C.E., dated 1-3-1989 is applicable to these goods, namely, petroleum resin.
29. In order to appreciate the contentions of both the sides, both the Notifications 27/89-C.E. and 28/89-C.E., dated 1-3-1989 are extracted below :-
Notification No. 27/89-C.E., dated 1-3-1989 Concessional rate on naphtha used in the manufacture of specified chemicals.
In exercise of the powers conferred by Sub-section (1) of Section 5A of the Central Excises and Salt Act, 1944 (1 of 1944), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts raw naphtha, falling under sub-heading No. 2710.14 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), intended for use in the manufacture of the products specified in the Table hereto annexed from so much of the duty of excise leviable thereon as is in excess of the amount calculated at the rate of Rs. 60 per kilolitre at 15° C on the quantity of naphtha consumed in the manufacture of the said products:
Provided that where the use is elsewhere than in the factory of manufacture the procedure set out in Chapter X of the Central Excise Rules, 1944 is followed.
Explanation.-
1. The amount of naphtha consumed in the manufacture of the products shall be calculated by subtracting from the quantity of naphtha received by the factory manufacturing the products the quantity of naphtha returned by the factory to a refinery, declared as such under Sub-rule (2) of Rule 140 of the Central Excise Rules, 1944.
2. In cases where certain goods which are incidental, inevitable, or involuntary to the process of manufacture the products specified in the said Table are produced in the course of the manufacture, the exemption under this notification shall, not be denied for the reason that the said goods are not products specified in the said Schedule.
TABLE _____________________________________________________________________________
1. Ethylene
2. Propylene
3. Butadiene
4. Iso-Butalene
5. Normal Butalene
6. Benzene
7. Toluene
8. Para-Xylene
9. Ortho-Xylene
10. Mixed Xylene
11. Methanol
12. Acetylene
13. Ethyl Benzene
14. Styrene
15. Cyclo-Pentadiene
16. Vinyl Chloride
17. 2-Ethyl Hexanol
18. Butanol
19. Hydrogen
20. Synthesis Gas
21. Ammonia Notification No. 28/89-C.E., dated 1-3-1989 G.S.R. In exercise of the powers conferred by sub-section (1) of Section 5A of the Central Excises and Salt Act, 1944 (1 of 1944), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts goods (other than blended or compounded lubricating oils and greases) falling under Chapter 27 of the Schedule to the Central Excises Tariff Act, 1985 (5 of 1986) produced in a factory and -
(a) utilised in the factory in which the said excisable goods are produced, for the manufacture of other goods or as fuel for such manufacture (excluding fuel used for any internal combustion engine) or both; or
(b) allowed to escape in the atmosphere by flare system or otherwise from the whole of the duty of excise leviable thereon which is specified in the said Schedule.
30. The sketches of the process and the appellants' contention of cut off point for applicability of the notification are also indicated supra.
The statements given under Section 14 of the Central Excises & Salt Act, 1944 of Shri Upendra Muni Ray Bhatt, Production Manager dated 12-10-1989, that of Shri S. S. Bhatnagar, Deputy Manager and that of Shri S. Sarkar, Deputy Production Manager are extracted below.
Statement of Shri Upendra Muni Ray Bhatt I am asked to state the process of manufacture of Petroleum Resin - what raw materials are used etc. In this connection I have to state that Pyrolysis Gasolene is being supplied by Gujarat Olefins Plant of M/s. IPCL, Baroda which is raw material for producing Petroleum Resin. This Pyrolysis Gasolene is being heated in a prefractionator at 120°C to 140°C for removal of Benzene, Toluene and Xylenes fractions and pre-moisture. After removal of above Cut it is fed to Gasolene fractionator column to get the desired heart-cut for the manufacture of Petroleum Resin which is containing Styrene, 2-Methyl Styrene, 3-Methyl Styrene, Vinyl Toluene, Indane and Methyl Indane etc. This heart-cut is sent to reactor for polymerisation for obtaining Petroleum Resins. In polymerisation process we are using Boron-tri-fluoride (VF3) as a catalyst. After polymerisation process we get resin dissolved in solvent which is neutralised to remove acidic part and then after it is washed with D.M. Water. The solvent is extracted from Resin and molten resin so obtained is sent to Pestillizer for preparing Resin in the form of Pestil.
I am asked to state that whether instead of Pyrolysis Gasolene C. 8 and C. 9 Cut Naphtha cannot be used in the manufacture of Petroleum Resin. In this connection, I have to state that so far based to my knowledge such type of process out of C. 8 and C. 9 Cut Naphtha is not existing.
Statement of Shri S.S. Bhatnagar "I am asked to state that whether the raw naphtha which is cracked, from which olefinic rich gas stream, pyrolysis Gasolene, Carbon Black Feed Stock are obtained. Out of which Pyrolysis Gasolene is used as Feed Stock in the Petroleum Resin Plant for manufacture of Petroleum Resin, is it not correct? In this connection I have to state that matter is highly complex and technical in nature but as per my understanding of matter, Pyrolysis Gasolene is an involuntarily incidental stream resulting from processing of raw naphtha for the specified intended uses, and therefore, is not 'Goods' hence non-excisable since it does not have any specific name, character or use and does not come to the market for being bought and sold. Further, assuming (without admitting) for argument sake that the said Pyrolysis Gasolene is classifiable under the Central Excise Tariff its captive consumption within our premises for the manufacture of Petroleum Resin is covered under Notification No. 28/89 dt. 1-3-1989, as amended. For the period prior to 1-3-1989 it is covered for full exemption for captive use in terms of Notification No. 276/67 dt. 21-12-1967, as amended.
As per your contention that Pyrolysis Gasolene is an involuntary and incidental stream. In this connection please state that during the course of manufacture of Benzene, Pyrolysis Gasolene is not required. In this connection, I have to state that as already stated hereinbefore that the matter is highly complex and technical in nature for which I am not technically competent to describe the process involved. However, production of Benzene out of Raw Naphtha through the stage of Pyrolysis Gasolene is permissible under the aforesaid notifications, such Pyrolysis Gasolene being incidental/inevitable/involuntary to the manufacture of the specified intended product which inter alia included Benzene.
I have been shown the classification list 4/88-89 dated 1-3-1989 filed by M/s. IPCL in which at Sr. No. 8, Pyrolysis Gasolene is classified under Chapter/Heading 2710.19 at the rate of Rs. 2255.00 per KL at 15°C vide Sr. No. 1 of Notification No. 75/84 dt. 1-3-1984 - please state how I have stated that Pyrolysis Gasolene is not 'goods' and not marketable. In this connection I have to state that the said classification list for Pyrolysis Gasolene has been submitted at the instance and insistence of the jurisdictional C. Ex. Officers including the Assistant Collector by declaring it as "an intermediate product" and by claiming exemption under Notification No. 28/89 dt. 1-3-1989 for captive use to meet with the operational requirements for the smooth functioning and operations of the plants without coming in confrontation with the Honourable C. Ex. Collectorate in such minor issues.
M/s. IPCL is bringing raw naphtha at concessional rate for manufacture of specified products under Notification No. 75/84 dt. 1-3-1984 as amended and Notification No. 27/89 dt. 1-3-1989 and Petroleum Resin is not covered under the aforesaid Notifications as specified products - what do you have to say in this regard? In this connection I have to state and impress again that use of raw naphtha though the intermediate stage of Pyrolysis Gasolene in the manufacture of Petroleum Resin is not only covered under Notification No. 75/84 & 27/89 but is also covered under Notification No. 28/89 dt. 1-3-1989 for use of Pyrolysis Gasolene for the manufacture of Petroleum Resins by way of captive consumption in fact that Pyrolysis Gasolene emerges as an inevitable or involuntary stream which is deemed to have been covered by various clarifications issued by C.B.E.C. for use of raw naphtha for Petrochemical purposes.
I am further asked that return stream of raw naphtha which is nothing but Pyrolysis Gasolene is returned back to refinery as return stream of raw naphtha after extraction of Benzene is it not correct. In this connection I have to state that the raw naphtha return stream are a mixture of C5 and C6 etc. and is not only Pyrolysis Gasolene as per my understanding of the matter, in absence of any specific definition of the term "Raw Naphtha" and/or "returned stream of Raw Naphtha" either in the C. Ex. & Salt Act, 1944 (including the rules made thereunder) or in the C. Ex. Tariff Act, 1985.
I am asked to state that as per my contention that Pyrolysis Gasolene is emerged as inevitable, incidental, involuntary during the cracking of raw naphtha, that is Pyrolysis Gasolene is inevitable/involuntary/incidental and M/s. IPCL is not using Raw Naphtha in the manufacture of Benzene but using Pyrolysis Gasolene in the manufacture of Benzene, then what is the necessity to send the raw naphtha as a return stream after extracting Benzene from Pyrolysis Gasolene which is incidental/involuntary/inevitable stream. In this connection I have to state that it is the use of raw naphtha through the intermediate stage of Pyrolysis Gasolene in the manufacture of specified products i.e. Benzene wherefrom one of the constituents join the return stream pool and is sent back to Gujarat Refinery as return stream of the raw naphtha. Since Pyrolysis Gasolene would continue to remain as raw naphtha in absence of any specific definitions of the term as per my little knowledge of technicalities involved. Further, sending back the return stream to Gujarat Refinery (IOC) is a matter of policy, planning and the technological understanding between IPCL, Gujarat Refinery and the Ministry of Petroleum with a view perhaps to enrich the Petroleum Gasolene Pool of the country.
The above statement is recorded as per my version which is recorded without any pressure or influence. I have read the same and found it correct.
Statement of Shri S. Sarkar I am working as a Deputy Production Manager in Gujarat Olefins Plant, BBH Section of M/s. Indian Petrochemical Corporation Ltd. Vadodara since 1985. I am looking after the production of Benzene, Butadiene, Pyrolysis Gasolene Hydrogenation Unit. I am also looking after the production of Ethylene, Propylene, Butadiene etc. M/s. IPCL, Vadodara is bringing Naphtha from Indian Oil Corporation (Gujarat Refinery) Baroda for manufacture of Ethylene, Propylene, Butadiene, Benzene and Carbon Black Feed Stock.
Regarding your query of about the chemical composition of Naphtha received from Gujarat Refinery I state that it contains 72 to 78% paraffins, Naphthalene 18 to 25% & Aromatic 4.5 to 10%.
I am asked to state the process of manufacture of Ethylene, Propylene and Benzene stepwise. In this connection, I have to state that first of all incoming Naphtha is mixed with dilution stream and cracked in the Heater at 810°C to 820°C without catalyst and it is known as thermal cracking. During process of cracking Naphtha is being converted to Olefinic rich gases stream, Carbon Black Feed Stock known as Pyrolysis Fuel Oil and the Pyrolysis Gasolene known by us as Pyrolysis B.T. rich stream. The olefinic rich gases stream are compressed and fractionated into Ethylene, Propylene, Mixed C. 4 and a portion of Pyrolysis Gasolene. We are not carrying out any further process in respect of Carbon Black Feed Stock. Pyrolysis Gasolene known as Pyrolysis B.T. rich stream obtained during thermal cracking as discussed above is partly sent to Petroleum Resin Plant as Feed Stock of Petrez and other part after removing lighter gases is used in the manufacture of Benzene.
In the manufacture of Benzene, first of all the Pyrolysis B.T. rich stream is hydrogenated into catalytic reactor where unsaturated hydrocarbons, Olefins & Diolefins are converted into mostly saturated hydrocarbons and we are also carrying out desulpherisation process to remove sulpher particles from it to make it suitable for Benzene recovery. After desulpherisation process it is fractionated to C. 6 rich stream containing Benzene, Toluene and other C. 6 saturated hydrocarbons. This stream is utilised in the Benzene Plant for the manufacture of Benzene, Cixon and small stream of Toluol. In the process of separation of hydrogenated Pyrolysis Gasolene C. 5 and C. 7 streams are sent to Refinery as naphtha return stream along with C. 6 Raffinate known as Cixon obtained from Benzene Plant after recovery of Benzene. It is further clarified that wherever Cixon (C. 6 Raffinate) is not sold as Cixon product by M/s. IPCL, then only we sent to refinery along with C. 5 & C. 7 Stream as Naphtha Return Stream.
I am asked to state whether the chemical composition of incoming stream from Gujarat Refinery and Return Stream sent to Refinery are same or otherwise. In this connection, I have to state that the Return Stream is a Naphtha as per definition of Naphtha. We are not doing chemical analysis as normal practice of return stream and hence it is difficult to say whether the chemical composition are same as that of Naphtha received from Refinery.
I am asked to state whether the Pyrolysis Gasolene known as Pyrolysis B.T. Rich Stream can be termed as Naphtha. In this connection, I have to state that as per the definition of Naphtha Pyrolysis Gasolene is also a Naphtha.
The Pyrolysis Gasolene also be termed as Naphtha is used partly in the manufacture of Petroleum Resin i.e. Petrez and partly in the manufacture of Benzene, (emphasis supplied by us)."
31. The question is as to whether the Pyrolysis Gasolene said to have been obtained from C8 C9 (Heat Cut) by polymerisation continues to be raw naphtha and also whether the residue after polymerisation is raw naphtha. The learned Collector has held that Petroleum Resin is a product not specified in the said notification and as such not eligible for concessional rate of duty. He has further held that the said notification under any circumstances does not cover use of raw naphtha, for the purpose of manufacture of Petroleum Resin.
32. Now it has to be seen as to whether Pyrolysis Gasolene can be considered as Raw Naphtha, as held by the Revenue, which was required to have been returned as per notification or could it be considered as - goods emerging as a by-product - in the course of the manufacture, which are incidentical/inevitable or involuntary in the process of manufacture of the products given in the Table of the Notification No. 27/89-C.E., dated 1-3-1989 or Notification No. 28/89-C.E., dated 1-3-1989.
33. In sub-para (iii) to Para (4) to the reply to the Show Cause Notice, the appellants have contended as follows :
"(iii) The Petroleum Resin plant was established in 1984 and requisite L. 6 licence has been obtained at the proper time. The usual records such as R.G. 1 Register, R.T. 12 statements are regularly being filed in this regard. The Raw Material for the Petroleum Resin is the residual Pyrolysis Gasolene after it has been stripped of Benzene and Toluene. This stream is again fractionated to get the desired heart-cut of C-8, C-9, which mainly contain Styrene, 2-Methyl Styrene, 3-Methyl Styrene, Vinyl Toluene, Indane and Methyl Indane etc. This heart-cut is then sent to polymerisation where Boron Trifluoride is used as a catalyst. Polymerised resin is dissolved in solvents, neutralised and the solvents are then removed by vacuum distillation. The Molten resin is sent to pestilizer unit for preparing the resins in the form of pestils. Thus, it could be seen that the raw material for the Petroleum Resins is the residue of the Pyrolysis Gasolene after it has been divested of the Benzene and Toluene. In other words, the raw material for Petroleum Resins is the residue left out which is the inevitable results of cracking of the Raw Naphtha at the initial stages.
34. It is clear from the above para that Pyrolysis Gasolene, which the appellants themselves have termed it as "the initial raw naphtha itself and from which various products are being stripped, like Benzene, Toluene etc. The above para read with the Charts and the manufacturing process submitted by the appellants, read along with the statements of witnesses, which the Department is relying, clearly indicates that Pyrolysis Gasolene is the initial input i.e. raw naphtha, which after several products are extracted by polymerisation and other processes is sent back to Gujarat Refinery as a return stream, extracting petroleum motor spirits etc. from it.
It is not the case of the appellants that this Pyrolysis Gasolene is a product which has emerged fully in a marketable form and capable of being marketed. They only contend that it is a residue. At every stage of stripping of one product, the balance of input continues to be raw naphtha. The technical information of raw naphtha from the Hawley's Chemical Dictionary at page 206, clearly indicates that several products can be extracted at varying temperatures from raw naphtha. After extraction of each product, what is left over is considered as a residue. Residue in this case after extraction of each item, however, continues to be raw naphtha of a different grade. The Gujarat Refinery takes back this residue for extraction of petroleum. Therefore, to say that residue is a waste, as contended by the appellants is not all tenable and correct. Even the definition of Petroleum as given in the Petroleum Act, recognises petroleum of different grades. Hence, the Pyrolysis Gasolene or the residue of it, is a part of the return stream of raw naphtha of different grade than the original one.
35. The appellants have not produced any evidence in support of their contention that Pyrolysis Gasolene is readily usable at the stage of extraction of C8 C9 (Heart Cut) but instead have admitted that it is still in the nature of raw material capable of being a source of extraction of several products. Therefore, the contention of the appellants, that the raw material of petroleum resin is the residue of the Pyrolysis Gasolene after it has been divested of the Benzene and Toluene or in other words their contention that the raw material for petroleum resins is the residue left out which is the inevitable results of cracking of the Raw Naphtha at the initial stages is not tenable and from the evidence on record it has to be rejected.
36. The further contention of the appellant is that 'C8 C9 (Heart Cut)' has emerged as an "inevitable, incidental or involuntary" to the process of the manufacture , of the final products Benzene and Toluene. But the evidence on record is to the contrary. 'C8 C9 Cut' is isolated in the resin plant from Pyrolysis Gasolene (which is raw naphtha) by fragmentation. It is separated by a special process by feeding Pyrolysis Gasolene to gasolene fractionator column to get the desired heart-cut for manufacture of Petroleum Resin (see statement of Shri U.M.R. Bhatt). Therefore, the appellants' contention that it is exempted under Notification No. 28/89-CE dated 1-3-1989 is not correct and not acceptable. In para 7 of page 9 of Memo, of Appeal, the appellants have stated that 'C8 C9 Cut' essentially consists of Styrene, 2-Methyl Styrene, Vinyl Toluene, Indane, and Methyl Indane etc. This admission clearly indicates that 'C8 C9 Cut' is still in the form of Raw Naphtha. The extract from Hawley's Chemical Dictionary given above clearly points to this conclusion also. This 'C8 C9 Cut' not being specified in the Table to the Notification No. 27/89-C.E., dated 1-3-1989 will not be entitled for grant of concessional rate of duty on raw naphtha diverted for manufacture of 'Petroleum Resin'.
37. There is a clear admission that Pyrolysis Gasolene is not 'goods' and it is a part of the return stream. In para 11 of the Appeal Memo, the appellants have admitted that "the residue obtained from the Pyrolysis Gasolene may be classified as Raw Naphtha but it is not the same Raw Naphtha which has been taken up for Thermal Cracking in terms of Notification No. 27/89-CE dated 1-3-1989". It is also admitted that the appellants had declared it as classifiable under Chapter/Heading 2710.19 at the rate of Rs. 2255.00 per KL at 15°C in their C.L. 4/88-89 dated 1-3-1989 only on the insistence of jurisdictional Central Excise Officers by declaring it as "an intermediate product". The appellants have also not resiled from the statements given by Shri S. Sarkar, Shri U.M. Ray Bhatt and Shri S.S. Bhatnagar but have admitted it to be factually correct. By considering these admissions and by going through their statements, which also have been extracted above, we have to hold that what the appellants are terming as' "residue of Pyrolysis Gasolene" known as Pyrolysis BT rich stream, is nothing but Return Stream of Raw Naphtha itself and not intermediate or final goods, falling in any of the items specified in the Table of the Notification No. 27/89-C.E., dated 1-3-1989. Pyrolysis Gasolene has not emerged as an "inevitable, incidental or involuntary process" during cracking of raw naphtha before extraction of Benzene and Toluene. It is also not 'goods' emerging as per the appellants' own admission.
38. The appellants have explained that what forms the raw material for the petroleum resin plant is not Pyrolysis Gasolene but 'C8 C9 Cut' which is isolated after removal of Benzene and Toluene. But this does not help their case in any way as noted already. 'C8 C9 Cut' is not goods, which has emerged as a technological necessity or as 'inevitable, incidental or involuntary process' but it has been extracted by special process of fractionalisation as per their own admission and statement of witnesses. It is not a specified item in the Table of the Notification No. 27/89-C.E., dated 1-3-1989. If the appellants want 'C8 C9 Cut' to be considered as an input or goods, then again they get disentitled to the benefit of concessional rate of duty on raw naphtha and it would amount to diversion of raw naphtha for manufacturing 'C8 C9 Cut'. This contention of the appellant is somewhat not correct and misleading inasmuch as the input declared in the declaration given in Form L-4, for manufacturing Petroleum Resin is not 'C8 C9 Cut' but 'Pyrolysis Gasolene'. The appellants have clearly misdeclared and misled the Department to believe that the input is 'Pyrolysis Gasolene' for manufacture of 'Petroleum Resin', while from the statements, grounds of appeal, contentions raised and evidence, it is not 'Pyrolysis Gasolene' but 'C8 C9 Cut'. The appellants have cited Assistant Collector's order dated 29-9-1984 as evidence of knowledge on the part of the Department. However, a perusal of the Asst. Collector's order shows that it is essentially an order determining classification of Petroleum Resin under the erstwhile Central Excise Tariff as between Item 15A and 68 thereof and deciding that the goods are classifiable under Item 15A, CET. The order does not indicate the particulars regarding the raw material to finished stage of the product that was before the Asst. Collector so as to facilitate a comparison with the set of facts surrounding the present case and which have been highlighted and discussed above.
39. The appellants have explained that they had declared the input for 'Petroleum Resin' in their L-4 form; filed flow chart and had given manufacturing process also. But in all these materials, the appellants have stated that the input for 'Petroleum Resin' is 'Petroleum Gasolene' and it was not declared that the fractionalisation of 'C8 C9 Cut' from Petroleum Gasolene after removal of Benzene, Toluene is being used as input for manufacture of 'Petroleum Resin'. They left several vagueness anddoubts and it has been done deliberately by misdeclaration as held by learned Collector. As such, the invocation of larger period for claiming the duty under proviso to Section 11A of the Central Excises & Salt Act is quite justifiable and maintainable. There being a clear violation of Rule 173Q with an intention to utilise the concessional benefit and to evade full duty payment, the penalty imposed is also justifiable. However, it has to be seen as to whether the duty calculation has been properly done. In this connection, Shri Swami-nathan, learned Consultant, pointed out that the Department had proceeded to calculate the duty on the basis of the entire Pyrolysis Gasolene removed to the Petroleum Resin Plant and hence it was not justifiable. As the Benzene and Toluene, which were extracted from the Pyrolysis Gasolene was entitled for benefit of concessional duty, the duty had to be calculated only on the balance of residue of Pyrolysis Gasolene diverted for extracting 'C8 C9 Cut'. In this connection, he has filed a fresh duty calculation sheet, by which the duty chargeable would be approximately only Rs. 4.36 crores and not Rs. 24,41,99,988.77 as confirmed in the impugned order. This appears to be a correct contention. The learned Collector has not given a clear finding on this aspect of the matter and hence the question of duty confirmation requires to be reconsidered by the learned Collector, by hearing the appellants on this question only and by taking fresh particulars for verifying the same and pass appropriate orders thereon.
40. As regards the imposition of penalty, there are justifiable grounds for imposing the same. As the duty element is likely to get reduced considerably and taking all the facts and circumstances into consideration, the penalty is reduced to Rs. 10 lakhs under Rule 173Q (a) (b) (d) of the Central Excise Rules.
The appeal is partly allowed.