Custom, Excise & Service Tax Tribunal
Ltu Delhi vs Gas Authority Of India Ltd on 30 November, 2018
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
West Block No. 2, R.K. Puram, New Delhi - 110066
Date of Hearing: 20/08/2018
Date of pronouncement:30/11/2018
Appeal No. E/55666/2014-DB
[Arising out of Order in Original No. 12-16-COMMISSIONER-14-15 & 6-11-
COMMISSIONER-2014-15 dated 24/07/2014 & 14/07/2014 passed by the
Commissioner of Central Excise-LTU DELHI]
C.C.E. & S.T.-Ltu Delhi Appellant
Vs.
Gas Authority of India Ltd. Respondent
Appearance Shri Harpreet Singh, Standing Counsel for the appellant Shri V. Lakshmi Kumaran Advocate for the respondent CORAM:Hon'ble Mr.Bijay Kumar, Member (Technical) Hon'ble Mrs. Rachna Gupta, Member (Judicial) Final Order No.53338/2018 Per: Rachna Gupta
1. The present is an appeal filed by the Revenue Department against the order of Commissioner Central Excise & Service Tax (LTU), the Order-in-Original No. 12- 16/ Commr./14-15 dated 23/7/2014.
2. The facts relevant for the purpose are that the respondent herein that is M/s GAIL (India) Ltd. is primarily engaged in the transportation of natural gas through pipelines. In addition to appellants are also engaged in manufacture of petroleum gases and other gaseous hydrocarbons, petroleum oils and oils obtained from bituminous minerals other than crude i.e. the products falling under Chapter heading 2710 of Excise Tariff at their different units situated at 2 Appeal No. E/55666/2014-DB Gandhar, Vaghodiya, Pata and Vijaypur. All having separate Central Excise registration certificates for the manufacture of the said excisable goods. Subsequently they have also obtained CTU membership on 10.4.2012. The Department observed that the respondent is mis-declaring one of the products that is "Natural Gasoline Liquid" (NGL) as "Naphtha" at the time of clearance from their factory premises NGL has a specific entry as Central Excise Tariff item 2710 12 20 (earlier at 2710 11 20), which attracts Central Excise Duty of 14 % ad volerum + Rs 15 per liter whereas Naphtha has specific entry 2710 11 90 (earlier 2710 12 90) of the schedule to Central Excise Tariff Act 1985 (CETA) and that it attracts the duty at the rate of 14 per cent ad volerum by along with the benefit of exemption under Notification No. 18/2009/CE dated 7/7/2009 (as amended). The Department on the basis of test Reports, alleged that respondents by such mis-declaration have short paid the duty to the extent of Rs 15 per litter on manufacture and clearance of NGL. Resultantly following five Show Cause Notices for the different units of the respondents were issued.
S.N. SCN issued by Plant Date of Period of Amount of
(Comm.) issue demand demand(in Rs)
1. Vododara-II Vaghodia 30.01.2012 January, 20,11,91,106/-
2011-
November,
2011
2. Vododara-II Gandhar 12.3.2012 April, 2011- 83,51,72,354/-
Janurary
2012
3. DGCEI, Nasik Vajaipur 04.02.2013 January, 4,26,55,00,071/-
2008-
3
Appeal No. E/55666/2014-DB
March,2012
4. DGCEI, Nasik Pata 04.03.2013 Feb.2008- 2,84,87,77,806/-
March,2012
5. LTU, Delhi Vaghodia 07.01.2013 Dec., 2011- 15,25,45,176/-
& Gandhar March,
2012
Feb,2012-
March2012
The said show Cause notices were adjudicated by the common order of the Commissioner LTU, that is the one under challenge, vide which she has dropped the entire demand concluding as follows:
(i) Naphtha and NGL are two different products, under the category of light oils and preparations falling under the broad sub heading of 2710 12 of the Central Excise Tariff Act, 1985.
(ii) Naphtha can be classified under tariff item 2710 12 19 under the sub category of motor spirit other than SBPS,(special boiling point solvent) as it was earlier (old six digit tariff) grouped under the sub category of motor spirits or it can be classified under tariff item 2710 12 90 under the category of light oils and preparations, other than Motor spirits and NGL.
(iii) The product Naphtha falling under heading 2710 is entitled for exemption under Notification No. 23/2006 dated 01.03.2006 upto 06.07.2009 and thereafter under Notification No. 18/2009 dated 7.7.2009.4
Appeal No. E/55666/2014-DB
(iv) Naphtha is a petroleum product and liquid product of natural gas not less than 10% of which distils below 175° C and 95% of which distils below 240° C when subject to standard method test as per Bureau of Indian Standards and Hawley's Condensed Chemical Dictionary. Both NGL and Naphtha are low boiling liquid petroleum products under the category of light oils and preparations.
(v) Naphtha has RVP slightly more than 10 psi can be treated as Naphtha, whereas NGL is having RVP more than 10 and upto 34 psi depending upon it volatility.
(vi) Both Naphtha and NGL contain pentane and heavier hydrocarbon.
(vii) The product cleared by the Noticee broadly satisfies the universally accepted parameters of Naphtha and also the definition and description of Naphtha as per various technical literature. The parameters of the product Naphtha cleared by the Noticee is similar to that of other manufactures of Naphtha i.e. ONGC, BPCL and MRPL. The product is bought and sold as Naphtha as is otherwise apparent from respondent, major customers and on the basis of individuals test reports submitted at the time of clearance of the product. Further Indian Institute of Petroleum has also certified the, product as Naphtha.
(viii) There is no suppression of fact on the part of the Noticee with the intent to evade payment of duty, as there is no evidence of alleged act. Hence no penalty can be imposed under Section 11 AC of CEA.
5
Appeal No. E/55666/2014-DB Being aggrieved of the said order the Department is before us vide the in present appeal.
3. We have heard Shri Harpreet Singh Standing Counsel for the appellant and Shri V.Lakshmi Kumar Ld. Advocate & Shri Anurag Kapur Ld. Advocate for the respondent/assessee.
4. It is submitted on behalf of Department that the committee of Chief Commissioner constituted statutorily under Section 35 E (1) of the Act, after examining the order in original has viewed the same as "not legal nor proper"
as the same has wrongly determined the product of the respondent as Naphtha despite obtaining the parameters from the Like M/s MRPL, ONGC, BPCL and India Institute of Petroleum Dehradun pointing it to be natural gasoline liquid. It is submitted that the Adjudication Authority below has ignored the statements of the customers of the respondent indicating that the product manufactured is NGL. It is otherwise an admission of the respondent themselves that they were initially clearing their product as NGL. There is neither the change in procedure of manufacture nor in the customers of the respondent despite the alleged change from manufacturing NGL to manufacture of Naphtha. It is further impressed upon that there is not only the ample evidence but the enough technical literature as well as data available on the net as well which are indicative of the fact that the product cleared by respondent is the product other than Naphtha as been held by the Chief Chemical Analyst vide its report dated 30th August 2011. He has 6 Appeal No. E/55666/2014-DB accordingly held the product of respondent as low boiling point liquid extracted from Natural gas which is other than Naphtha. NGL is specifically defined vide supplementary note of chapter 27 of CETA as low boiling petroleum product extracted from natural gas. Since, the chemical examiner report also duly classifies the impugned samples having same property, the Adjudicating Authority has committed blatant error while still holding the samples/product of respondent as Naphtha. NGL and Naphtha are impressed as two different products as have otherwise been recognized differently even by CETA.
4.1 .The Ld. Counsel also impressed upon the fact that the only drawn sample along with test memo was the first sample having the report dated 31th August 2011. The remaining samples' test reports as have been relied upon to an extent by the respondent, were obtained without preparation of any test memo. As the result, the Report of 31th August, 2011 only can be relied upon based whereupon it is abundantly cleared that the product of respondent is not Naphtha but NGL inviting extra duty of Rs.15 per liter in addition to 14 per cent ad volerum duty. The authority below is therefore alleged to have committed an error while ignoring the said test report. It is also impressed upon that the contents are otherwise acknowledged and admitted in the statements of the officer in charge of respondents and also in the statements of the respondent's customers. While miserably ignoring those statements as a corroborative piece of evidence to the report of chemical examiner the Adjudicating Authority definitely has committed error. The Department has 7 Appeal No. E/55666/2014-DB accordingly prayed for the order under challenge to be set aside. In addition it is submitted that since there is major duty difference between NGL and Naphtha, the impugned mis-classification cannot be ruled out to be a deliberate strategy with intention to evade the payment of additional duty on NGL. The Department was thus entitled to invoke the extended period of limitation. The findings of the order under challenge to that effect also are prayed to be set aside appeal is accordingly prayed to be allowed.
5. While rebutting all these arguments, it is submitted on behalf of the respondent assessee that they are the manufacturers of liquefied petroleum gas (LPG) and Naphtha at four of their plants. It is submitted that initially they were manufacturing NGL ,however, due to presence of high amounts of pentane their product was extremely volatile. Due to which the provisions were made to spike the manufactured NGL back into the feed stream along with the lean gas. It is impressed upon that the said factum has dully been recorded by this Tribunal in respondents own case i.e. GAIL vs. CCE Indore and Vadodara 2004 (170) ELT 75(Tri-Delhi), and that the said decision was also upheld by the Hon'ble Supreme Court vide its decision reported at 2015 (390) ELT 5 (SC). The said process change and manufacturing of pentane and special-boiling point solvents (SBPS) was brought to the notice of the Department vide respondent's letter dated 21/2/2000. It is thereafter that the Government instructed respondent to stop manufacturing SBPS due to potential misuse thereof and to manufacture an alternate product since then the respondent is manufacturing Naphtha. The Ld. Counsel has impressed 8 Appeal No. E/55666/2014-DB upon the procedure adopted by respondent/assessee for manufacturing Naphtha, from natural gas by first converting gas into a liquefied portion then subjecting it to further fractioning thereby removing the lighter hydro carbons mainly Methane (C1), Ethane (C2) and Propane (C3). Thereafter the content is transferred to the LPG column where mixture of Propane (C3), Butane (C4) is separated from the top of the column and the heavier fractions that is Pentane and Hexane are fed into NGL fractioning column. From the top of this column Pentane is separated and the bottom product having hydro carbons ranging from Hexane (C6) and above are stored as Naphtha. Due to the product being classified as Naphtha having tariff item 2710 11 90 that the respondent were availing the benefit on the concessional rate of duty under Notification No. 18/2009/CE dated 7/7/2009. In the line of these submissions it is alleged that the Department had initiated a wrong investigation against the respondent. The show cause notices have wrongly proposed the demand of differential duty of excise on the product of respondent that is Naphtha wrongly allegeding the same to be a natural gasoline liquefied (NGL) classified under Tariff item 2710 11 20.
6. It is submitted that the chemical examiner's report dated 30th August 2011 is based on the false presumption that since the product is derived from natural gas it is a low boiling liquid other than Naphtha. It is submitted that there is ample of technical literature even the lab texts reports the shows that even Naphtha can be manufactured from natural gas as contrary to the stand of Chemical Examiner. The Ld. Counsel further impressed upon that the cross- 9
Appeal No. E/55666/2014-DB examination of the Chemical Examiners vanishes entire sanctity in the report which is the sole criteria for the Department to inhibit the impugned adjudication against the respondent. The Ld. Counsel further impressed upon that the Chemical examiner has miserably been silent about giving any reason as to why sample tested cannot be treated as Naphtha. The Chemical Examiner is alleged to have a wrong understanding that Naphtha and NGL are two different chemical/ petroleum products obtained from two different sources. It is reiterated that Naphtha can also be obtained from Natural Gas. The report of examiner is, therefore, alleged to be full of discrepancies and thus is unreliable.
6.1. The sample which was drawn by the Department subsequently were with the malafide motive of testing Reid Vapour Pressure (RVP), the same being differentiating criteria for the impugned both the products. However no new test memo was issued at the time of subsequently drawn samples. There otherwise is discrepancy about who visited Vadodara unit for drawing and testing samples. Ld. Counsel pointed out towards the contradiction in the statement of chemical examiner and that of Mr. Krishan Kumar, in-charge of engineering laboratory in Vadodara unit. The samples from Gandhar as well as Vadodara were collected at the same time by one and the same person despite the fact that there is the distance of almost 125 Km. between the two units due to which it is not practically possible for one single person to visit both the units and to collect samples and also to test them on the same day. Otherwise also there appear no 10 Appeal No. E/55666/2014-DB bases for the Chemical Examiner for arriving at the conclusion about RVP of the sample from Gandhar and Vadodara Unit to be found as 10.23 PSI. 6.2. It is further submitted that non availability of Mr. Pradeep Maru who is asserted to had gone for collecting said samples, is sufficient to extend the benefit in favour of the assessee and to falsify the allegations of the department. As he would have been the most-relevant witness for bringing the precise clarity about the controversy in question. With holding his availability for being cross examined by the assessee clearly establishes the mala fide of the Department to assert and get confirmed a wrong claim heavily detrimental to the interest not only of the respondent but to the industry as a whole.
6.3. Further, while justifying the order under challenge, Ld. Counsel for respondent has submitted that as per the Technical literature, tests reports of respondent's product and the specification of other manufactures Naphtha have duely been compared by the Adjudicating Authority below for rightly holding that the product in question is Naphtha. Legal and technical literature as to Naphtha (Acquisition Sales Search and Prevention of Use in Automobile) order, 2000, Indian standard glossary of Petroleum terms, Hawley's condense dictionary, literature from Indian Institute of Petroleum, Dehradun and handbook of hydro carbons, manual of Department Instruction of Excisable Manufactured Products etc. has been relied upon by the respondent to define Naphtha as a product different from natural gasoline liquid and as one having such specification as are 11 Appeal No. E/55666/2014-DB reflected in the chemical examination reports dated 30th August 2011 thereby impressing upon that the product manufactured and cleared by the respondent/assessee is nothing but Naphtha to which the exemption under Notification 18/2009 and 18/2012 was very much available to the respondent. In alternative, it is argued that no duty can be demanded as the impugned product is classified under Chapter heading 2709. 6.4. It is further impressed upon that the end use of Naphtha and natural gasoline liquid are absolutely different. However Naphtha can also be manufactured from natural gas contrary to the stand of the chemical examiner. Had the respondent been not providing Naphtha to its customers he would have been amenable to litigation on account of the breaching its contractual obligations. Since the definition of Naphtha as not been provided within the frame work of laws, it is required that Naphtha is to be understood. Finally it is submitted that in the manner the persons engaged in the trade understand it to be in commerce parlance and that the onus of classification lies upon the Revenue. The respondent assessee has relied upon falling the case laws;
7. After hearing both the parties, at length and perusing the entire record and literature referred we are of the opinion:
8. The moot question to be adjudicated herein is as to whether the product manufactured by the respondent /assessee is Natural Gasoline Liquid (NGL) having excise duty at the rate of 14 per cent ad volerum plus Rs.15 Rs per 12 Appeal No. E/55666/2014-DB liter having tariff entry as 2710 12 20 or it is Naphtha having the excise duty at the rate of 14 per cent ad volerum and tariff entry as 2710 12 90.
Since, the entire case rests upon the reports given by the Chemical Examiner and that the product manufactured and cleared is the petroleum chemical product, it is foremost relevant to understand the chemistry of both these products.
9. For the purpose we have perused the literature as has been impressed upon by the respondent/assessee i.e. Indian Standard Glossary of Petroleum Terms, Hawley's Condense Dictionary, Indian Institute of Petroleum Dehradun literature, handbook of Industrial Hydro Carbons Process Manual of Departmental Instructions on excisable manufactured products.
10. In addition the Handbook on Petroleum Products by Gems G. Schied and also, the wikipedia portal is being looked into with respect to the Chemistry of products from petroleum refinery. We have concluded our observation as far as the chemistry involve for various products of petroleum refineries with the specific reference of the products under adjudication i.e. NGL and Naphtha as follows:
Name of the Number of C The Uses of the fraction
fraction at the atoms in the approximate Many are useful fuels-
different hydrocarbon boiling range in alkenes hydrocarbons but
condensation molecule the C of the they are non-renewable
levels(% in fraction fraction fossil fuels-specific use
crude oil) depends on physical
properties(see later
Fuel Gas, LPG C 1 to 4 Methane CH4(domestic
13
Appeal No. E/55666/2014-DB
refinery gas Mainly heating) ethane another
(1-2%) propane and <25°C gaseous fuel, C3-4easily
butane gases liquefied petroleum gas,
which can be portable energy source .g.
compressed or bottled gas for heating and
liquefied cooking(butane),higher
pressure
cylinders(propane),feedstock
for other organic chemicals
Gasoline C 5 TO 7 25 TO 75°C Easily vaporised, highly
flammable, easily ignited, car
fuel-petrol molecules
Naphtha C 6 TO 10 75 TO 190°C No good as a fuel, but
(20-40%) Light Naphtha valuable raw material source
150 to 240° C of organic chemicals to make
Heavy Naphtha other things, cracked to
make more petrol and
alkenes
Paraffin, C 10 TO 16 190 TO 250° C Less volatile, less flammable
Kerosene than petrol, domestic central
(10-15%) heating fuel, (paraffin)
aircraft jet fuel(kerosene)
Diesel oil, gas C 14 TO 20 250 TO 350°C Less volatile than petrol,
oil diesel fuel for some cars and
(15-20%) larger vehicle like haulage
trucks, trains, central heating
fuel, also cracked to make
more petrol and alkenes
Heavy fuel oil, C> 20 TO ̴ 30 >350°c Not so easily evaporated,
heating oil, not as flammable, safe to
lubricating oil, store, liquid fuel oil for
greases power stations and ships,
quite viscous(sticky)and can
also be used for lubricating
oils(lubricants, mineral oils)
and greases.
RESIDUE-fuel C>30, maybe High boiling Low melting solids used as
oil, lubricating up to several liquids or low candle wax, clear waxes and
oils, waxes And hundred melting solids, polishes(can be dyed)And
14
Appeal No. E/55666/2014-DB
Bitumen that boil over the biggest molecules make
( 40-50%) 350°C bitumen/asphalt-low
Bitumen melting solid used on roads
components as it forms a thick, black,
boil over a tough and resistant adhesive
500°C-700°C surface on cooling, used as a
roofing waterproofing
material(it sticks rock chips
on roofs or road surfaces)
Based on the above mentioned literature we have been concluding that the NGL and Naphtha are highly overlapping constituents of oil refineries both being hydro carbons ranging from Butane (C4) to that of Heptanes (C12) and even above. However, with the help of entire above mentioned literature including those as relied upon by the respondent we have concluded the following differences between the impugned two products as:
NGL Naphtha Produced from natural gas or Produced from crude oil by way of produced during extraction process fractional distillation & even from in the field by way of retrograde natural gas condensation & even by condensation and also by destruction distillation of wood. isomerisation of normal pentane.
The first unit in extraction process is The first unit is crude oil distillation light end fractionate for followed by unit or fractional unit. Also available liquefied petroleum gas column from at the bottom of LPG column where the top where of propane and NGL distils into aromatic rich Naphtha butane are removed as LPG and at (ARN) superior kerosene oil (SKO) the bottom of this column are High speed diesel(HSD) Aviation collected pentane & hexane as NGL. Turbine Fuel(ATF). 15
Appeal No. E/55666/2014-DB Initial B.P. 35°C. Final boiling point is Final B.P. 240°C though initial B.P. is 75° more than 50 % evaporates at 35°C light Naphtha (35° C -140° C) 60° C Heavy Naphtha (140°C-240°C). Not less than 10% distils below 175°C It contains Mostly Pentanes (C5) It contains traces of Hexane and more with traces of Hexanes (C6/C6). of larger hydro carbons, Light Naphtha (C6-C8). Heavy Naphtha(C8-C12) Flash point is around 20 . Flash point is as low as -2 Transparent clear liquid of low Translucent, flammable, liquid of boiling point. boiling point as 240 °C (though within the range of low boiling point liquid) Density is around 80 API Around 10 API.
NGL is a set of ARN, SKO, HSD & Naphtha is subset thereof being the ATF. fractionating product Octane Rating -low octane content High octane content
11. Applying the entire above chemical/ technical discussion about the impugned products to the facts and circumstances as well as the evidence of the present case we proceed to adjudicated the question as formulated above as follows. The entire case revolves upon the report of chemical examiner dated 30th August 2011 as reproduced below;
Test Report from SCN or O-i-O. "The samples are in the form of clear colourless low boiling liquid. It is manly composed of lighter mineral hydrocarbon oil, having following characteristic, 16 Appeal No. E/55666/2014-DB % C5 = 53.21 %C6 =33.50 % Evaporation at 60°C = 66.0 Distillation Range = 38°C to 121°C Density at 15°C = 0.6730 The sample is a low boiling liquid, extracted from Natural gas. It confirms to the requirement of "Natural Gasoline liquid" (NGL) as specified in CETA. It is other than Naphtha".
12.The samples from two units were subsequently withdrawn and the test reports result thereof are as follows;
VADHODIA GANDHAR PATA VIJAYPUR N 30/8/2011 10/1/201 30/08/2012 10/1/20 23/3/2012 23/3/2012 2 12 1. Density 0.673 0.6863 0.6728 6798 at15°C 2. API gravity 74.6 78.81 76.65 3. Flash 25°C 25° C 25 C 25 C Point(Below) 4. Distillation 38-121°C 38-121° C 41-121°C 36-121° 39-125 C 39-128C range C 5. %of 66 70 40 70 65 58 evaporated at 60°C 6. C5 53.21 86.71 37.5 74.6 55.1 44.47 7. C6 33.5 39.4 32.4 37.02 8. RVPat 10.23 10.23 10.15 10.1 37.8°C(psi) 9. Colour Colourless Colourles colourless Colourless s 17 Appeal No. E/55666/2014-DB 10. End Point 121 °C 121° C
13.If all these reports looked in comparison to the above observations based on the chemical literature, it is observed as:
13.1. The presence of lower hydro carbon i.e. pentane was found more than Hexane. As per the glossary of terms in Bureau of Indian standards, NGL is such petroleum product having fairly higher proportions of pentane and even butane and propane than the presence of higher hydro carbons. Had it been Naphtha, the sample would have traces of pentane with more of higher hydro carbons.
But as per the chemical examination report, the impugned sample was found to have only two kinds of hydro carbons i.e. Pentane(C5) and Hexane(C6). Though the Ld. Counsel had impressed upon the same to be called as light Naphtha having the hydro carbon as that of Pentane, Hexane, heptanes etc but number of hydro carbon being the key difference between the two products herein, more presence of lower hydro carbon with traces even of butane is sufficient to classify the product as NGL and not even light NAPTHA. 13.2. The flash point for Naphtha is as low as -2 if it is below 25° it is more the characteristic of NGL. The flash point finding also corroborates the sample to the NGL. Apparently and admittedly the appellants were manufacturing their product from natural gas. As 18 Appeal No. E/55666/2014-DB already discussed above that it is the natural gasoline liquid which is produced from natural gas by way of retrograde condensation whereas Naphtha is extracted by way of distillation that too from crude in normal course. No doubt, the Naphtha can also be obtained from the bottom of distillation chamber after extraction of NGL but the same does not sounds reasonable in the terms that when the product can be extracted directly from crude why the element of more steps shall be involved in extracting the main product indirectly, involving ore expedition had it been the main product as is thus, it becomes clear that since natural gas is used as raw material the main product extracted is NGL.
13.3. No doubt the boiling range for Naphtha (light as well as heavy) is from 30°C to 240°C and that of NGL is 30° to 140°C i.e. the range is overlapping but the range classifies that for a product to be Naphtha only 10 per cent and more thereof has to distilled below 175°C as per impressed upon definition of Hawley's Condensed Chemical Dictionary (relied upon the respondent assessee). Whereas in the present case more than 66% of product has evaporated at 60° temperature. Thus there remains no doubt that the sample belongs to the product having comparatively lesser boiling point range, which is NGL as apparent from above discussed chemistry. Thus irrespective, that both are NGL as well as Naphtha classified as low boiling liquid petroleum product extracted from natural gas but the fact remains is that the product 19 Appeal No. E/55666/2014-DB herein is the one which is evaporating at its maximum at lower temperature and as observed from the above table concluded from the literature provided by the respondent, it is NGL which has lesser boiling point range than that of Naphtha. The argument of respondent that light Naphtha also has lower range of boiling point is also not acceptable because the sample herein has more number of Pentane (C5) with traces of Hexane(C6) & as discussed, for sample to be classified as light Naphtha, it first has to be Naphtha i.e. The compound having more Hexane(C6) and even higher hydrocarbons with traces of Pentanes(C5).
13.4. Chemical Examination report classified that sample has 53.21 -% of C5 and lesser percentage of C6 i.e. 33.20-%. Number of carbon being the key difference(as mentioned above) between NGL & Naphtha, we are of the opinion that Chemical examiner has not committed any mistake in his report dated 30th August 2011 while making the observation that the sample is the low boiling point liquid other than Naphtha. The respondent had never contested the said report at the appropriate stage in appropriate manner.
14. The case law as relied upon by the respondent to impress that it was the duty of Department to prove the classification of the product/article is not applicable to the present facts and circumstances as department herein has already discharged its burden of proving the product manufactured by 20 Appeal No. E/55666/2014-DB respondent is NGL and not Naphtha. Thereafter it is for respondent to rebut if they feel aggrieved. But there is nothing brought on record to falsify the said report except the minor procedural discrepancy while obtaining the samples from the other units of respondent and while getting those samples tested. Also the respondent had opportunity to contest the said report below itself. But admittedly said option has not been exercised by the respondent. From the above discussion it becomes clear that chemistry involved in extraction & segregation of various hydrocarbons in a refinery or petroleum industry supports that the product extracted by respondent is Natural Gasoline liquid and not Naphtha.
15. For further appreciation from the view point of evidence on record herein we observe and opine as:
15.1. Various statements of the officer bearers, employees and even the customers of the respondent assessee, are looked into. It is observed that the General Manager of Respondent Mr. M.B. Gohil has specifically defined the assessee's product as "low boiling liquid petroleum product extracted from natural gas". The said description is in due corroboration of the chemical examiner's report on which based is the Department's case. Mr. Gohil has gone to the extent of clarifying that the proportion of propane and butane are fairly high in their product in its instability condition which are removed to yield a stabilised natural gasoline. The same is acknowledged as a distinct 21 Appeal No. E/55666/2014-DB product extracted from a specified raw material viz natural gas. In his statement dated 31st August 2012, he also acknowledged the feasibility report of LPG recovery plant Pata as was submitted by the senior officer of respondent itself, that the said report specifically envisages the product therein to be NGL. He specifically stated that the plant was initially erected to manufacture NGL however some modifications were carried out subsequently to produce some other products such as special boiling point solvents (SBPS) and Naphtha.
He then detailed the procedure adopted at their factory deposing that natural gas is used as the raw material by them from which first LPG (C3,C4) got separated in the LGP chamber. The condensate thereof is transferred to the NGL fractioning chamber from the top whereof is recovered NGL (C5,C6) and from the bottom whereof the another low boiling point liquid i.e. Naphtha is collected.
This witness when was specifically asked about the key differences between NGL and Naphtha, he expressed his inability. Similar inability was expressed by Shri L.R. Gupta, the General Manager,(Finance and accounts) of the respondent. He deposed about decentralisation of all locations of respondents as far as the finance is concerned. However payments of Central Excise duties are being made from respective units. He could not depose as to product of which unit is Naphtha. Not even in terms of the duty deposited by Gandhar Units whose sample has been acknowledged as NGL. Mr. M.B. Gohil and Shri C.N. 22 Appeal No. E/55666/2014-DB Chatruvedi Executive Director (petrochemicals) of the respondent also deposed about distillation range of Naphtha that not less than 10 % of which distils below 175° C and not less than 95 % of which distils below 240° C. Accordingly, to them he rather deposed that he is not competent enough to offer any comments in the matter regarding the classification of the product and the differential duty liability in the matter. In his statement dated 3/3/2012.
"He deposed that, what leaves the LEF/C2-C3 column, in their plant after removal of lighter components, which further enters into Propane or LPG column for their extraction, may be termed as Natural Gasoline Liquid which as per above said definition is nothing but the wild form of Natural Liquid. In the succeeding column, the Propane and Butane are further removal from this liquid, by way of fractional distillation and what leaves the said columns appears the stabilized form of National gasoline and not Naphtha. The said liquid being qualified to be called as a "low boiling liquid", as understood in the Petroleum Chemistry of Petroleum Engineering has already been discussed in foregoing paras, which has also been corroborated by the Chemical Examiner Grade. 1, Vadodara Even the Adjudicating Authority has opined that Shri Gohil in his above said statements has himself described unstable and stable form of National Gasoline Liquid and has also explained that removal of lighter fraction makes the Natural Gasoline liquid a stable product. Thus, it appeared that what is manufactured by the Noticee under the name and narration of Naphtha is nothing but stabilized form of Natural Gasoline Liquid.23
Appeal No. E/55666/2014-DB 15.2. Mr. Anup Kumar Gupta Chief Manager (gas processing unit) has also deposed that from the bottom of the LPG column NGL is extracted and to reduce its volatility that the procedure of Pentane removal, was later incorporated. He also depend that the goods produce at Pata unit of respondent: are Ethane/Propane mixture, LPG, Pentane and Naphtha. The hydrocarbons extracted from Natural gas. He also deposed the procedure of extraction in due corroboration to Mr. M.B. Gohil. However with reference to NGL, he denied his knowledge even about the full name thereof. Now, if the statement of Mr. Arjan Kalara Jadav Chief Manager Operations is perused. It appears that respondents were extracting the NGL from the bottom of LPG column, he also deposed that before year 2011 respondent used to crack the said NGL further to form MFO but thereafter the said NGL used to be sent to a butanizer to obtain the required suitable product. 15.3. When all these testimonies it become clear that the product manufactured by respondent is the one as is collected from the bottom of LPG column the said product was earlier used to be cracked to be converted into MFOs but beyond the year 2011 the said product is simply butanized. It is also apparent from the statement of Mr. M B Gohil that the sample as was collected on 24/08/2011 with test report of chemical examiner dated 30th August 2011, was collected from the loading area. Above all these statements makes it ample clear that the de-butanized product of LPG column goes to the loading area. Thus it 24 Appeal No. E/55666/2014-DB becomes clear that the product manufactured by the respondent has not come across the stage of distillation of NGL whereafter only the product collected could be Naphtha, as can readily be observed from the above discussed chemistry and even from the above said statements. From another statement of Mr. Kalara senior chemist of the respondent, it is clear that the sample is not denied. He specifically deposed that in their lab they were instructed only to test the density, IBP and FBP of the product manufactured they were never asked to report as to whether the said sample is Naphtha. Perusal of the statement of this witness makes it clear that he could not offer comments as to whether the density, IBP and FBP values as given in his report matches the characteristic of NGL or that of Naphtha.
16. Senior Manager Production Mr. Rajiv Kumar of M/s Reliance Industries Petro Chemical, the major customer of the respondent/assessee was also examined. He specifically deposed that the material which they is getting from the respondents are the hydro carbons ranging from (C5 & C15). Though he specifically deposed that the product which is received from respondent is Naphtha but simultaneously he deposed that after receiving the same M/s RIL need to de-butanize the product. As already discussed above the presence of Butane is a key characteristic of NGL. Hence it stands corroborated that the product purchased by M/s RIL from the respondent/assessee was NGL. Otherwise also, this witness, was also 25 Appeal No. E/55666/2014-DB specifically asked about any idea regarding the product as that of natural gasoline liquid but he outrightly denied his knowledge. He being Senior Manager Production is supposed to be chemically and technically sounds for the products cleared by his unit such a vague denial affects the respondent adversely. Shri Pritesh Patel Director of M/S Maa Bijasani Petrochemical Pvt. Ltd. (a customer of respondent) has deposed that product purchased from M/s Gail is produced from natural gas and is costlier. Irrespective he named this it becomes clear that since natural gas is used, the main product extracted is NGL and not Naphtha product as Naphtha but Natural Gasoline Liquid. He denied any knowledge about Natural Gasoline Liquid. We opine that denied adversely affects the respondent.
16.1. The statements of the people from other petro chemical industries as that of M/s Bharat Petroleum Corporation (BPL) M/s ONGC the major oil marketing companies as were recorded are also perused. They all acknowledged that the Naphtha they are manufacturing is extracted from refined crude oil in their crude distillation units. As already discussed above, that is the characteristic manufacturing process for Naphtha. Admittedly and apparently, the Naphtha by respondent assessee is not manufactured by crude oil but by natural gas that too not by the method of distillation but by method of condensation. Mr. M.B. Gohil more specifically defined the product of respondent based on Indian Glossary of Petroleum Products as low boiling liquid 26 Appeal No. E/55666/2014-DB petroleum product extracted from natural gas. When these testimonies are read together these are observed to have ample. He has gone to the extent of stating that Propane and Butane are fairly high natural gas which are removed to yield stabilized natural gasoline thus natural gasoline is classified by him as the distinct product from a specific parameters finds natural gas 16.2. Thus from the statements of various customers of the respondent/assessee it is coming as an apparent admission that the product purchased by them from the respondent that is M/s Gail is different from Naphtha which has been purchased from other Naphtha manufacturing companies as per.
17. From the above discussions it becomes clear that the chemically NGL and Naphtha are two different products having overlapping physical and chemical properties but the key differences as discussed above have when seen in relation with the statements on record have established it beyond doubt that the product manufactured by the respondent/assessee is natural gasoline liquid (NGL) which attracts duty at the rate of 14 per cent ad volerum + Rs. 15 per liter and not Naphtha.
18. Now having seen the controversy from the Central Excise point of view we hold that;
The Product of the respondent is admittedly the one falling the chapter under 27, the controversy is as to whether it falls under 2710 12 20 that is NGL or under 2710 12 90 i.e. Naphtha Chapter 27 deals with mineral fuels, 27 Appeal No. E/55666/2014-DB mineral oils and product of their distillation; bituminous substances, mineral waxes. Chapter note 2 keeps petroleum oils and oils obtained from bituminous substances under heading 2710. Chapter supplementary note specifically defines natural gasoline liquid (NGL) as a low boiling liquid petroleum product extracted from natural gas. It is observed that in the old Tariff Naphtha and NGL were specifically mentioned to be classified under motor spirit and both had specific entries in tariff. But in the new Tariff NGL is treated separate from motor spirit and continues to have a specific entry i.e. 2710 12 20 but Naphtha finds no mention under the new Tariff. However both have been grouped under "light oils and preparations". If at this stage the report of chemical examiner about the sample in question is observed, it specifically mentions the product as a low boiling liquid petroleum product extracted from natural gas. The new tariff defines such a product specifically as NGL. Once this is so, there is no reason to still hold the product as Naphtha. To our opinion the findings of the Adjudicating Authority below that the chemical examiner have not given any reason as to why the sample tested is to be treated as Naphtha. The findings are rather opined to be based on pre-supposition that the product in question is Naphtha.
18.1. Central Excise Tariff in its various Notifications distinguishes NGL & Naphtha. Since NGL is defined in Chapter notes, NGL reflected in the Notification is a derivative of Natural Gas and Naphtha being shown separately other than NGL, it is a product of Petroleum oil. Also in 28 Appeal No. E/55666/2014-DB the exemption Notification Naphtha has been categorically placed under CETA 2710 of the schedule to CETA, thus it becomes clear that Naphtha can be classified under the broad category of other light oils and preparations i.e. under 2710 11 90 also.
19. Thus irrespective that Naphtha is a low boiling liquid petrol product but as is discussed above, it is not directly extractable from natural gas this may be the reason for no specific entry called Naphtha under Chapter 27. The classification of the product in the Central Excise Tariff has to be done as per the rules of Interpretation, Chapter notes and Section notes contained in the Tariff. The definition under the trade parlances and Commercial understanding or definition under any other literature including scientific literature can only be referred if specific definition is not given in the chapter or the section notes. Hon'ble Supreme Court in the case of Cannought Plaza Restaurant Pvt. Ltd. 2012 (286) ELT 321 (Supreme Court) has held that the classification of an excisable goods shall be determined according to the terms of headings as per Rules of Interpretation in the First Schedule, to the Tariff Act. Rule 2 thereof says that it is only when the headings of the chapter or section notes are not clearly determinative of the classification that Rule 3, 4 or 5 of the said general rules of Interpretation will come into the effect. The entries are to be construed according to common parlance understanding of the goods only in a situation where there is no statutory definition of the product. Hon'ble Apex Court further clarified that ordinary rule of construction is that a provisions to statue must be construed in 29 Appeal No. E/55666/2014-DB accordance with the language used therein unless there are compelling reasons such that the literal construction would reduce the provision to absurdity or would prevent manifest intension of the legislature from being carried out. Naphtha described here is in generic term. Since two separate origin of the product Naphtha has been described, the product can be named as "Petroleum Naphtha" if derived from oil/petroleum and " gas Naphtha " if derived from Natural gas, such a terminology is not uncommon in the Petroleum industry Gas Naphtha here also contain low boiling point hydrocarbons and is liquid as well. But the fact remains is that present Tariff has nothing called Naphtha. Per Contra, NGL has specifically been classified & defined too.
20. The Hon'ble Apex Court in a recent decision Commissioner of Customs Mumbai vs. M/s Dilip Kumar & company and Others 2018 TIOL 302 (SC) while overruling the decision on Sun Export Case, 2002 TIOL 118 (SC) has held that when words in statue are clear and unambiguous and only one meaning can be inferred the courts are bound to give effect to the said meaning irrespective of the consequences.
It was further held that if the words used are capable of one construction only then it would not be open to the courts to adopt any other hypothetical construction on the ground that such construction is consistent with the alleged policy of the act. Hon'ble Apex Court has also clarified that the exemption notification also has to be strictly construed so that if the person claiming exemption does not fall strictly within the letter and spirit of the 30 Appeal No. E/55666/2014-DB notification, he cannot claim exemption. The respondent in the present case is also availing the benefit of exemption Notification about Naphtha but word Naphtha has not find any place under new Tariff Entry. Any benefit cannot be claimed of non existing entry irrespective the product exist and is classifiable under any other Tariff head. At this stage it may be seen that chapter heading 2710 old 6 digit Tariff, which existed in 2005 there was a specific sub heading 2710 14 for Naphtha and 2710 15 for NGL, both were the products grouped under broad heading of motors spirit however in the present 8 dejected Tariff entry of Naphtha has been removed and natural gasoline liquid is grouped under a variety of light oils and preparations (2710
12) and continues to exist being classified under Tariff item 2710 12 20. Supplementary note (b) of Chapter 27 of CETA defines NGL as a low boiling liquid petroleum product extracted from natural gas. NGL has been separated from the group of Motors sprits. Earlier NGL, SBPS and Naphtha all were under the Tariff Group of Motors spirits,( as discussed above). This we take as a ground to hold that legislate intended to seggregate NGL, it being a different product then Naphtha irrespective both being low boiling point liquids.
21. The Authority relied upon by the respondent are not opined applicable to the present case. As in that case the product was the one as that of remnant/return stream. The Hon'ble Apex Court in that case has specifically held that in the absence of the definition of Naphtha in Central Excise Tariff, its understanding in technical books along with the report of Chief Chemist 31 Appeal No. E/55666/2014-DB should be accepted for its classification. But, in the present case the product is the one as was admittedly collected from the bottom of LPG column and was de-botanized later and from the technical understanding as well as from the Report of chief chemist, it is NGL, i.e. the low boiling liquid other than Naphtha. It was also held by Hon'ble Supreme Court that as per the Rules of Interpretation an Item if it is not specifically covered by way of the precedent entries, it would fall under a residuary entry. This finding rather support the product in the present case as the one falling under the specific entry that is 2710 12 20 i.e. NGL sufficiently established that the product of respondent is not Naphtha as has been reported by the chief chemical examiner in his report dated 30.08.2011( as discussed above). In addition, Naphtha is defined to be a compound having carbon atoms ranging from C4 to C12. As discussed above, the evidence on record is that the product of respondent has more of C5 with traces of C6 and other higher hydro carbons as nil. Seen from this angle the product in hand is NGL having a specific definition in the Tariff. The question of construing it as Naphtha from the view point of the ordinary or popular sense has no relevance. 21.1. No doubt the onus is upon the department for establishing that goods are classifiable under a particular tariff entry. We are of the opinion that the chemical examiner report dated 30th August 2011 is the sufficient evidence with department to discharge the said burden. Due test memo was prepared while collecting the sample of the said report on 24th August 2011. The Chemical Examiner was 32 Appeal No. E/55666/2014-DB cross examined by the respondent. Except the minor contradictions nothing could be extracted to prove the product as Naphtha. The respondent has nowhere confronted the chemical examiner with the specifications of Naphtha and that the specifications of the sample match with that of Naphtha. Further, the contradictory stand of respondent is very much apparent from his reliance upon the case Gail vs. Commissioner 2004 (17) ELT 78 (Tribunal-Delhi) where the respondent has impressed upon the NGL to have fallen under Chapter heading 2719. Also respondent in alternative, has prayed for rejecting this appeal on this grounds submitting that no extra duty is leviable under heading no. 2719. This submission rather amounts as apparent acknowledgment on the part of the respondent for its product to be NGL and not Naphtha. It is also observed from this case law that it was acknowledged on the part of the M/s Gail "it is universally known that in the process of extraction of LPG from natural gas NGL would be imparted. As already discussed above the product of respondent is the one which is extracted from LPG column it has to be NGL and not Naphtha. The said case however is not applicable to the present case for the reason that the product involved therein was the condensate whereas the product in hand is the one collected from the bottom of LPG column. Similar acknowledgment of appellant is apparent in another of its case Commissioner vs. Gail 2015 (390) ELT 5 Supreme Court where M/s 33 Appeal No. E/55666/2014-DB Gail 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 the product in hand is not natural gas but natural gasoline liquid specifically defines under Chapter heading No. 2710.
22. Further as per the information available in Wikipedia, respondent i.e. M/s Gail is the largest natural gas processing and distribution agency in India initially it was given the responsibility of constructing, operating and maintaining Hazira/Vijaypur/Jagdishpur /HVJ pipeline product it is one of the largest natural gas by pipeline product in the world. Its business is to secure gas for being transported to various part of the country though M/s GAIL has diversified into petro chemicals and liquid hydro carbons but the key product of M/s Gail is still natural gasoline liquid (NGL) (78.15), LPG 10 %, propane 3.5%, Naphtha 0.5% and other products 0.45 %. The sample collected is admittedly of the major product of the respondent seen from this information as well there is no reason to hold the product of respondent as Naphtha Adjudicating Authority is therefore opine to have committed an error.
23. In the light of the entire above discussion, we concluded as follows;
The Adjudicating Authority below has rightly concluded that Naphtha and the NGL are two different products however under the category of light oils and preparations. Naphtha is a petroleum product of which not less than 10 % distils below 175°C and 95 % of which distils below 240°C when subjected 34 Appeal No. E/55666/2014-DB to standard method test and both contains pentanes and heavier hydro carbons. But the Adjudicating Authority failed to observe that the product in hand has only two kinds of hydro carbons i.e. pentanes and hexanes that too with more of pentanes(53.21%). No doubt both these products are overlapping but still the key difference (as discussed above) is that for a product to be Naphtha it should have traces of pentanes and more of higher hydro carbons groups even to the extent of C12. Apparently and admittedly later is not the case the product hence has wrongly been concluded as Naphtha. The distillation range of the product is less than 175°C. As per the conclusion of original Adjudicating Authority and the chemical definitions about Naphtha it is the product of which not more than 10 % distils below 175°C, when the entire amount of the sample got distils below 121°C and this the literary evidence that NGL has much lower distillation range than Naphtha, the Adjudicating Authority has committed the blatant error while still holding the product as Naphtha. The conclusion arrived at by the Adjudicating Authority below are the correct characteristic for a product to be Naphtha. But the authority has filed to apply those conclusions to the evidence on record and the available literature(chemistry). The decision under challenge is held to be non-speaking decision reflecting a pre- supposed mind of the authority in ignorance of the entire material on record.
24. Finally coming to the plea of Show Cause Notices being barred by time; 35
Appeal No. E/55666/2014-DB From the entire above discussion, it is clear that the product of the respondent has wrongly been classified by the respondent as Naphtha. It is also apparent fact that the Naphtha has much lesser Excise Duty as less as Rs. 15 liter. In view thereof mis-declaration cannot be ruled out to be a strategy for tax evasion. We also opine that the act to the extent of even claiming exemption on the mis-declarated product is a positive act of mis- representation of the facts with sole intention to evade duty. Resultantly the Department, in view of the proviso to Section 73 of Central Excise Act, is held to be very much entitled to invoke the extended period of limitation. Not only this, the penalties are also held to have been rightly proposed in the show cause notices but wrongly done away by the Adjudicating Authority below. The case law as relied upon by the respondent to impress that it being PSU no malafide can be attributed is not applicable to M/s GAIL where Government of India is not the only stake holder. We draw our support rather, from Bharat Petroleum Corporation Limited vs. Commissioner-2015 (326) ELT A33 (SC) where it was held that mandatory penalties can be imposed on PSU there are precedent of involving penalty on PSUs. Hon'ble High Court Madras in another case CCE, Chennai vs. Peter & Miller Packers 2015(319) ELCT 631 (Madras), has also held that ignorance of law is not an excuse even to PSU, if there is element of apparent on its pact. In the present case the mis-declaration on pact of respondent has already been established. Major duty difference on the mis-declared product is also held to be the strategy of tax evasion. Merely that assessee 36 Appeal No. E/55666/2014-DB is PSU is not sufficient to set aside the SCN as being barred by time. To this aspect also Adjudicating Authority below is held to be incorrect.
25. It is held that the Adjudicating Authority below has committed a blatant error while dropping impugned such a heavy demand that too vide non- speaking order having just the recitals of the facts and the statements with not cogent reasoning of arriving to the conclusion that the product is Naphtha. The entire chemical literature and even the evidence in the form of statements (as discussed above) has miserably been ignored by the Adjudicating Authority below. He has failed to connect the same with the conclusions drawn in Order-in-Original. The conclusions of Commissioner detailed above, in view of the entire above technical and factual discussions are held to be mere conclusion about characteristic features of the product of the respondent without any finding as to whether these concluded characteristic are of NGL or Naphtha. The findings of ours, based on chemical literature available and the evidence on record, classify the product of respondent as Natural Gasoline Liquid (NGL). Hence it is held that Commissioner rather has proceeded with the pre-supposed mind of holding the product of respondent being Naphtha. The findings accordingly are held as apparently wrong hence are hereby set aside. Resultantly the impugned order is set aside and the appeal of the Department is hereby allowed.
(Pronounced in open court on 30/11/2018)
(Bijay Kumar) (Rachna Gupta)
Member(Technical) Member(Judicial)