Customs, Excise and Gold Tribunal - Mumbai
I.P.C.L. vs Commissioner Of Central Excise on 25 January, 2005
Equivalent citations: 2005(189)ELT337(TRI-MUMBAI)
ORDER
Jyoti Balasundaram, Vice-President
1. The appellants herein have a Gas Cracker plant, wherein they manufacture various petroleum products such as ethylene, propylene, mixed C4, mixed oil etc. falling under Chapters 27 and 29 of the Schedule to the Central Excise Tariff Act, 1985. They receive Feed Gas (natural gas) from M/s. Gas Authority of India through pipe lines and carry out processing by removal of impurities and then manufacture various products such as ethylene, propylene and gaseous hydrocarbon. Investigations revealed that they had been clearing gaseous hydrocarbons to M/s. GAIL, Gandhar without payment of central excise duty during the period October 1999 to June 2002. The value of the sales of this product during this period was Rs. 343,03,27,218/-. The gases were tested and found to consist mainly of methane which is a hydrocarbon having chemical composition of CH4 and also containing traces of higher hydrocarbons and negligible percentage of carbon dioxide and nitrogen. A specimen gas laboratory report submitted by M/s. GAIL revealed the following composition :
Sr.No. Stream Description Composition 1. C1 Methane 98.077 2. C2 Ethane 0.915 3. C3 Propane 0.028 4. IC4 Iso-Butane 0.009 5. NC4 N-Butane 0.067 6. IC5 Iso-Pentane 0.283 7. NC5 N-Pentane 0.282 8. C6 Hexane 0.028
2. The gases appeared to be classifiable under CET sub-heading 2711.29 and effective rate of duty was 8% from October, 1999 to February, 2002 and 16% thereafter. It was further revealed that gaseous hydrocarbons being cleared by the appellants to GAIL were being in turn sold to M/s. NTPC, M/s. Sarabhai, M/s. Alembic and others. Statements of various persons were recorded. The Finance Officer of the appellants deposed that they were receiving gases from M/s. GAIL and cracking the same and they were recovering some of the hydrocarbons from it, that the residual gas was sent back to M/s. GAIL termed as "Lean Gas". He further stated that residual gas was being sent back to GAIL without raising any invoice and without payment of Central Excise Duty, that as per the contract with GAIL they were billed for the quantity of gas returned and consumed by them and this was calculated by subtracting the quantity of gas returned by them from the quantity of gas received by them. The Dy. Project Engg. Manager of the appellants explained that they were two stages in the Gas Cracker Plant (1) Ethane-Propane Recovery Plant and (2) Gas Cracking Plant after recovery of Ethane and Propane. The brief description of process carried out at the Ethane-Propane Recovery Plant was explained by him as follows :
"The Gas was received in the plant from M/s. GAIL through pipeline. The Gas was received at an average pressure of 32 kgs per square cm. After receiving the said Gas it is first compressed in the Inlet Gas Compressor to about 42 kgs per square cm. Thereafter, the Gas was sent to Gas sweetening unit wherein the CO2 content was removed. There, the Activated Carbon was also used for removing the impurities generated from the circulation of Gas Spec. Solvents. Anti-foam was also used there for preventing the formation of foam during the circulation of Gas Spec. Solvent. Further, Gas was dehydrated in MS Dehydration to remove the water contents with the help of Alumina Balls and Molecular Sieve. Thereafter, the Gas was chilled in Cryogenic section to separate C2 + Products. There, the Ethane and heavier hydrocarbons settle down at the Demethaniser Column and the C1 i.e. Methane Gas goes out and was compressed in the Residue Gas Compression unit. Thereafter, the return stream Gas was Spiked with C4 and C5 contents, which were separated from the Hydrocarbons collected at the Demethaniser Column at the GCU (Gas Cracker Unit). Propylene refrigeration system was used in chilling section".
He also submitted the composition of gas before and after spiking with C4 (butane) and C5 (Pentane). The average hydrocarbon content of gas before spiking was stated by him to be as under :
Components Mole (%) Methane 98.61 Ethane 1.12 Propane 0.01
From the above it was seen that the return stream gas was composed of mainly methane with traces of Ethane hydrocarbons. It was noticed that after spiking with C4 and C5 hydrocarbons, there is a definite change in the composition of the gas. Before spiking, it was just Methane with traces of Ethane and Propane and after spiking there was an addition of heavier hydrocarbons. The process carried out at the Ethylene Propylene Recovery Plant was recorded by the Sr. Production Manager. Investigations revealed that the natural gas emerging from the oil wells in the oil fields was first processed by M/s. ONGC at their plant in Gandhar where they were carrying out the process of separation of condensate from the gas, separation of moisture, compression of gas and recovery of condensate before compression of gas, thereafter the gas was sent to M/s. GAIL for cracking, whereby LPG was manufactured by blending butane and propane emerging during the cracking of gaseous hydrocarbons. The resultant gas after cracking at the LPG recovery plant was sent to the appellants where they carried out process of recovery of ethane propane by fractionation and further cracking of the gas. During the fractionation, the lighter gas mainly methane and some part of ethane was emerging at the top of Fractionator column and heavier hydrocarbons such as propane, pentane, hexane emerged at the bottom of the Fractionation column. After extraction of ethane and propane, the residue gas was cleared back to GAIL. The Department was of the view, based upon the entries in the CETA, 1985, and the definition of petroleum products in the Oil Industry (Development) Act, 1974, that natural gas is that gas which occurs in nature for which no processing has been undertaken and that the gas manufactured by IPCL after extracting ethane and propane cannot be called as natural gas, but is a petroleum product. The exemption available to Lean Gas under Notification No. 75/84-C.E., dated 1-3-1984 was held not to be available to the residual gas being sold back by IPCL to GAIL and therefore, the gaseous hydrocarbons returned to GAIL were held to be liable to duty under CETA sub-heading 2711.29. On this basis duty demand of Rs. 50,01,92,296/- was raised by the show cause notice dated 4-2-2003. The notice also proposed imposition of penalty equal to duty upon IPCL and penalty on its Sr. Officer (Excise & Customs). Extended period was invoked on the ground that the appellants had not obtained Central Excise Registration for the manufacture of the product in dispute, did not file classification declaration for the same and price list/price declaration for the same and did not maintain proper records of production and clearance of finished excisable goods in their statutory records and did not discharge duty on the petroleum gas cleared back by them to M/s. GAIL. The notice was adjudicated by the Commissioner of Central Excise, Vadodara, who upheld the charges levelled in the show cause notice, confirmed the demand together with interest and imposed penalty of equal amount upon the appellant-company but dropped penal proceedings on its Sr. Officer. Hence, this appeal.
3. We have heard both sides.
4. The first issue for determination is, whether the gas remaining, after removal of condensate by ONGC, removal of LPG by GAIL and removal of ethane and propane by the appellants, is a natural gas. The show cause notice alleged that the gas sent to the appellants by GAIL cannot be considered as natural gas since propane and ethane which are two components of gas were recovered by cracking process carried out by GAIL. However, the appellants are correct in their contention that GAIL separated ethane and butane from natural gas received from ONGC by fractionation process as derivation of ethane is fractionation of natural gas (see p 473 of Hawley's Condensed Chemical Dictionary). It does not involve cracking. According to the Commissioner, the natural gas after being processed by ONGC, GAIL and the appellants for extraction of various components would cease to be gas in its natural state.
5. On the other hand, reliance has been placed by the appellants in support of the submission that such gas would continue to be natural gas, on technical literature. According to Encyclopedia of Chemical Technology, Third Edition, Vol. 12 at page 331 - natural gas is defined as -
"Condensable hydrocarbons are removed from natural gas by cooling the gas to a low temperature and then by washing it with a cold hydrocarbon liquid to absorb the condensables. The uncondensed gas (mainly methane with a small amount of ethane) is classified as natural gas. The condensable hydrocarbons (ethane and heavier hydrocarbons) are stripped from the solvent and are separated into two streams. The heavier stream, which contains largely propane with some ethane and butane, can be liquefied and is marketed as liquefied petroleum gas (LPG)."
As per Energy Information Administration (page 355 of Volume II) Dry natural gas has been defined as -
"Natural gas which remains after : (1) the liquefiable hydrocarbon portion has been removed from the gas stream (i.e. gas after lease, field, and/or plant separation); and (2) any volumes of non-hydrocarbon gases have been removed where they occur in sufficient quantity to render the gas unmarketable. Note :- Dry natural gas is also known as consumer-grade natural gas. The parameters for measurement as cubic feet at 60 degrees Fahrenheit and 14.73 pounds per square inch absolute."
According to Vol. 11 of Encyclopedia of Chemical Technology by Kirk-Othmer, Third Edition at page 311 -
"Natural gas is classified in several broad categories based on the chemical composition : (1) wet gas contains condensable hydrocarbons such as propane, butane, and pentane; (2) lean gas denotes an absence of condensable hydrocarbons; (3) dry gas is a gas whose water content has been reduced by dehydration process; (4) sour gas contains hydrogen sulfide and other sulfur compounds; and (5) sweet gas denotes an absence of hydrogen sulfide and other sulfur compounds. Natural gas sold to the public is described as lean, dry, and sweet as illustrated in Table 5."
From the Encyclopedia of Energy Technology and the Environment -Vol. 3, it is clearly brought out that natural gas can be -
"(a) "lean", in which methane is the major constituent;
(b) "wet", which contains notable amounts of the higher molecular weight hydrocarbons;
(c) "sour" which contains hydrogen sulfide;
(d) "sweet" which contains little, if any, hydrogen sulfide;
(e) "residue" gas, which is natural gas from which the high molecular weight hydrocarbons have been extracted and
(f) "casing head" gas which is derived from petroleum but is separated at the well head."
The book titled as "Chemistry and Technology of Petroleum" by James G. Speight, shows that the types of natural gas vary according to composition and can be dry or lean gas (mostly methane).
In trade and commercial parlance, the gas in question is sold by GAIL as natural gas as seen from GAIL's invoices at prices fixed for natural gas by the Ministry of Petroleum.
6. In the case of Oil India Ltd. v. CCE, 2002 (51) RLT 1030 (upheld by the Supreme Court) [2004 (170) E.L.T. A116 (S.C.)], it has been held by the Tribunal that gas after removal of LPG and C5/C6 fraction is also natural gas. The relevant paragraphs of the judgment are reproduced below :
"12. This appeal relates to dutiability and classification of lean gas generated in the LPG plant of the appellant. In the earlier portion of this order we have referred to the constituents of the natural gas as obtained from oil well. During the process of extraction of LPG (C3 & C4, C5 and C6 get converted into liquid form. This is recovered and added back to the crude, C3 and C4 are recovered in equal proportion in liquid state and the resultant product is termed as LPG. The natural gas after removal of easily liquefiable components is termed as lean gas if total GPM of the gas is less than 2.5. The natural gas containing largely Methane, Ethane and Propane is cleared from the mines using same pipeline, which is used for supply of wet natural gas to its customers. The lean gas also has calorific value within the range specified for natural gas and has the same end use as wet natural gas. Hence, mix of lean gas and wet gas is also billed as gas and is sold at the price fixed by the Ministry of Petroleum for natural gas. The facts, as stated above and as put forward by the assessee are not challenged by the Revenue.
14. Notification No. 179/85 was amended to include the new tariff headings of goods produced in mines and included under sub-heading 2711.21. The assessee took the stand that natural gas after extraction of LPG, remains natural gas and therefore, lean gas is also to be classifiable under sub-heading 2711.21 and entitled to the exemption granted under Notification No. 179/85.
On merits also we are of the view that the appellant is fully justified in contending that since the lean gas is treated as natural gas it has to come under Heading 2711.21 and not under Heading 2711.29. In the result the impugned order is set aside."
7. In the light of the above, we accept the contention of the assessees that the gas in question is natural gas in gaseous state.
8. The next issue to be addressed is whether the product in dispute is lean gas and its eligibility to exemption from duty in terms of Notification No. 3/2001, dated 1-3-2001 (in terms of Sr. No. 36 of the table thereto) and 6/2002, dated 1-3-2002 (in terms of Sr. No. 35 of the table thereto). The period in dispute in the present appeal is October, 1999 to June, 2002 and prior to 1-3-2001 natural gas in gaseous state falling under GET sub-heading 2711.21 attracted Nil rate of duty under the Tariff.
9. The show cause notice proceeds on the basis that the gas to be returned by IPCL to GAIL should be of certain specifications as given in the contract. We note that the only stipulation relates to hydrogen sulphide and water content Spiking of C4 and C5 which are present in traces in the gas which contains 98.77% of C1 i.e. methane and 0.91% of C2 i.e. ethane and there is no stipulation with regard to composition of gas. The show cause notice also relies on C.B.E. & C Circular No. 35/88, dated 22-12-1988 clarifying that mixture of crude gases referred to as lean gas and consisting of Nitrogen, Carbon Dioxide, Water Vapour, Carbon-Monoxide and some other inert gases generated in the course of manufacture of Carbon Black need not to be subjected to excise duty. The notice as well as the order placed reliance on this circular to allege that the residue gas obtained by the appellants after extracting ethane and propane is not lean gas.
10. However, as seen from extracts from Encyclopedia of Chemical Technology by Kirk-Othmer, lean gas denotes an absence of condensable hydro-carbons. According to "Oilfield Processing of Petroleum" 'Volume 1' - by Francis S. Manning and Richard E. Thompson, a gas is termed as lean or rich as follows :-
"Lean : <2.5 GPM Moderately-Rich : 2.5-5 GPM Very Rich : >5 GPM"
From the table of Typical Gas Analyses in the same Technical Book, it is seen that if Methane is 91.94% GPM is 2.5; if Methane is 83.74% GPM is 3.2; if Methane is 82.13 the GPM is 5.5. In the present case, even as per the impugned order, methane content is 98.77. Therefore, GPM will be less than 2.5.
In the Oil India case cites supra, it has been held that the natural gas after removal of easily liquefiable components is termed as lean gas if total GPM of the gas is less than 2.5. Therefore, the product in question is definitely lean gas.
11. Let us examine definition of lean gas in other text books : GPSA Engineering Data Book defines lean gas as -
(1) the residue gas remaining after recovery of natural gas liquids in a gas processing plant, (2) Unprocessed gas containing little or no recoverable natural gas liquids.
The Illustrated Petroleum Reference Dictionary defines lean gas as -"natural gas containing little or no liquefiable hydrocarbons."
Oilfield Processing of Petroleum Vol. 1 Natural gas defines Lean Gas as -
"(1) Residue Gas after recovery of NGL.
(2) Unprocessed gas containing little or no recoverable NGL."
McGraw-Hill Dictionary of Scientific and Technical Terms - Fifth Edition defines Lean Gas as -
(1) in natural - gas absorption processes (such as natural - gasoline recovery from natural gas), gas from which desired liquid components have been removed.
(2) Natural gas poor in butane and heavier-liquids.
As seen from Vol. II of Encyclopedia of Chemical Technology by Kirk-Othmer, Third Edition page 317 -
"Natural gas liquids are recovered from natural gas because of their economic value and because they pose a safety hazard if allowed to condense and accumulate in transmission lines and distribution systems. The extent to which gas is processed depends on the available gas flow rate, liquefiable content, market availability, and product demand and price. Natural gas liquids can be sold as an ethane-free mixture of propane, butane, pentanes and higher hydrocarbons. In larger plants the components can be separated into specification products. In areas where the petrochemical industries are concentrated, ethane is recovered, elsewhere, the ethane adds to the value of natural gas."
Oilfield Processing of Petroleum Vol. 1 at page 349, sets out that -
"The Cs and heavier hydrocarbon fractions, which are liquids at atmospheric temperature and pressure, are commonly known as Condensate or Natural Gasoline, while ethane, propane and butanes, when extracted, are collectively known as Natural Gas Liquids or NGL."
12. The Commissioner has also relied upon the calorific value of the product in dispute exceeding 4000 Kcal/NM to hold that the disputed product cannot be considered as lean gas. The criteria of calorific value not exceeding 4000 Kcal/NM for lean gas is taken from Chapter 6 in book on Fuels and Combustion dealing with Gaseous Fuels by Dr. Samir Sarkar. This chapter relied upon in the show cause notice deals only with gaseous fuels and will not be applicable to gas used as feed stock. The same chapter also indicates that calorific value alone is not a satisfactory parameter for the technological classification of gaseous fuels. It is seen from the same book that the natural gas has calorific value 8400 Kcal/NM. The leanest of lean gas will also have calorific value of not less than 8400 Kcal/NM.
It is explained by Shri S.R. Patwardhan, Department of Indian Institute of Technology that no hydrocarbon gas in oil industry, including the lean gas, which is predominantly methane, will have calorific value less than 10,000 Kcal/NM3.
The opinion of M.C. Dwivedi relied upon by the Department itself states that-
"Besides the above standard definition of "Lean Gas" when gas used as "Fuel", the word "Lean Gas" has been used very loosely in chemical process industry and gas processing. It is used for the gases coming out of a process after removal of a high value or low value material. Consequently, lean gas in different processes may mean different materials. It may be a value added or low value or even waste product. Some examples are sighted as follows."
In a natural gas processing plant the gas, after recovery of C5, C4, C3 and C2 is often called lean gas. This may be used as raw material for fertiliser manufacture or as fuel. This is a arbitrary process nomenclature indicating removal of some components. However, if used as fuel this will not be classified as "Lean Gas" as the calorific value of this gas will be in the range 8000 to 9000 Kcal/NM3. Further the Indian Institute of Petroleum, Dehradun has clarified the position in their letter dated 2-8-2001 in favour of the assessees. The letter is re-produced herein below :
"As you would be already aware, the terms "lean gas" and "rich gas" relate to natural gas processing industry. Natural gas, as it comes out of oil wells, contains hydrocarbons other than methane, such as ethane, propane, butane, NGL, condensates etc. These heavy hydrocarbons are of value in terms of their use for various applications, and, hence the natural gas processing industry worldwide processes this natural gas to recover such heavy hydrocarbons. The natural gas which contains such heavy hydrocarbons is called "rich gas" while after recovery, the left over gas is called "lean gas" since it is now lean in such heavy hydrocarbons. In India, in our major natural gas installations, such as, Uran and Hazira, such a lean gas is sent downstream, for example, into the HBJ pipeline. However, this gas still contains recoverable quantities of heavier hydrocarbons and hence organizations, such as Gas Authority of India Ltd., have put several "LPG recovery" units along this pipeline to recover such heavy hydrocarbons. Again, the feed gas to such units, in relative parlance, is called rich gas" while the gas leaving such installations after the heavy hydrocarbon recovery is called "lean gas". You will, therefore, see that the terms Lean Gas/Rich Gas are highly relative and subjective terms and are amenable to different interpretations by different people. With regard to your specific enquiry relating such terminology with calorific value, for use of this gas as a fuel, we are not aware that such a relationship legally exists in India. In fact, the price of natural gas and its trading worldwide is based on the available BTU, i.e. internationally, natural gas is sold and purchased in terms of dol-lars/MMTU (a copy of the natural gas prices downloaded from a website is attached for your reference). We, at Indian Institute of Petroleum, would suggest that you may like to consider a mechanism based on such a principle, i.e. Rs./MM Kcal rather than Rs./NM3. Indeed, this would also help in our national endeavour to save precious fossil fuels, particularly, hydrocarbons, as the industry would then see an incentive in reducing their specific energy consumption by making their processes more energy efficient. Needless to say, this would, in turn, result in reducing environmental pollution and emission of green house gases."
The opinion dated 6-8-2000 of the Jt. Director of the Central Excise Laboratory defines lean gas as "denotes an absence of condensable hydrocarbons".
This opinion refers to Table 5 of the Kirk-Othmer Encyclopedia which gives the composition of lean gas/dry gas/sweet gas as methane between 89.5% to 92.5%. Therefore, this report itself shows that if the content of methane is 89.5% then the product is lean gas. In the present case, methane content in the product is over 98%. Therefore, there can be no doubt that the product in dispute is lean gas.
13. In the light of the above, we have no hesitation in holding that the product in question is lean gas eligible for exemption under Sr. No. 27 of the Table appended to Notification Nos. 3/2001, dated 1-3-2001 and 6/2002, dated 1-3-2002.
14. In the light of our findings above on merits, we do not deem it necessary to record any finding on limitation aspect.
15. In the result, we hold that the product in question is natural gas in gaseous stage, falling for classification under GET sub-heading 2711.21 and is a lean gas entitled to benefit of exemption from duty in terms of Notification Nos. 3/2001, dated 1-3-2001 and 6/2002, dated 1-3-2002, set aside the impugned order and allow the appeal.