Customs, Excise and Gold Tribunal - Delhi
Collector Of C. Ex. vs National Organic Chemical Industries ... on 15 May, 1990
Equivalent citations: 1990ECR541(TRI.-DELHI), 1990(49)ELT314(TRI-DEL)
ORDER D.C. Mandal, Member (T)
1. The facts of the case are that the respondents are manufacturers of petrochemical products in their factory by cracking raw naptha at high temperature and pressure. Their factory premises have been declared as a "Refinery" by the Government of India, Ministry of Finance (Department of Revenue & Insurance) vide Order No. 18/19/66-Tax-III dated 16-5-1967. Along with similar petrochemical products, they produced ethylene, propylene and butadiene in the said factory since 1968 and filed classification lists from time to time classifying these three products under Item 11-AA(2) of the erstwhile Central Excise Tariff and claiming the benefit of exemption Notification No 276/67 dated 21-12-1967. The classification lists were approved by the Department from time to time. In November, 1984, the Central Excise Collectorate, Thane issued a Trade Notice to the effect that petroleum gases, viz., ethylene, propylene and butadiene, manufactured from raw naptha in a petrochemical refinery and stored under pressure in 1iquid condition were classifiable under Tariff Item 68. By a letter dated 14-12-1984, the Superintendent of Central Excise, Range III, Thane Dn. IV asked the respondents to file a classification list for these products under Tariff Item 68. They sent a reply dated 26-12-1984 intimating to the Superintendent of Central Excise that an approved classification list could not be revised on the basis of a Trade Notice which was not binding on the assessee. However, they filed a revised classification list for these three products under Tariff Item 68 under protest without prejudice to their right to classify them under Tariff Item 11-AA and not under Tariff Item 68. From 1-1-1985 they started clearing these products on payment of duty under Tariff Item 68 under protest. On 19-3-1985, the Superintendent of Central Excise issued a show cause notice-cum-demand for duty a mounting to Rs. 1,27,08,533.40 on the quantity of ethylene, propylene and butadiene cleared from that factory during the period from 1-9-1984 to 31-12-1984. In reply to the show cause notice they stated that they had been clearing these products for the previous 16 years without payment of duty on the basis of approved classification lists under Tariff Item 11-AA(2) read with exemption notification No. 276/67-C.E. dated 21-12-1967; that the approved classification lists could not be changed without cogent reason merely on the basis of a Trade Notice as held in the case of Nevichem Plastics Ltd. (1983-ECR-1888-D) by this Tribunal and in 1981-ELT-804 (Delhi) by Delhi High Court and that ethylene, propylene and butadiene which are petroleum products derived from refining of raw naptha, which is a crude petroleum product, fell squarely within the ambit and scope of Tariff Item 11-AA. The Assistant Collector of Central Excise, Thane Dn. did not accept the contentions of the respondents. He held the view that Tariff Item 11-AA(2) covered petroleum gases and gaseous hydrocarbons (other than L.P.G.) derived from refining of crude petroleum or shale. According to the Petroleum Trade Glossary in the Petroleum Products Hand Book edited by V.B. Guthrie the term "Refining" meant "the separation of crude petroleum into its component parts and the manufacture therefrom of finished commercial products by distillation, thermal or catalytic cracking process using chemicals and treating". Raw Naptha is not crude petroleum. In fact raw naptha is obtained from refining of crude petroleum. As the cracking of raw naptha was not exactly the same thing as refining of crude petroleum, the respondents' propylene, ethylene and butadiene could not be said to be derived from refining of crude petroleum. He further observed that Tariff Item 11-AA(2) applied only to hydrocarbon in gas form and not to gases in liquid form. Accordingly, he held that the three products in dispute were not classifiable under Tariff Item 11-AA, but under Item 68. The benefit of Notification No. 276/67-C.E. dated 21-12-1967 was, therefore, not admissible. The Assistant Collector also held that the approved classification could be changed after following the principle of natural justice. As regards the Trade Notice, he observed that he was not basing his decision on the Trade Notice, but he came to the above conclusion by applying his own mind. He rejected the respondents' protest, changed the classification to Tariff Item 68 and confirmed the demand for duty of Rs. 1,27,08,533.40. On an appeal filed against the Assistant Collector's decision, the Collector (Appeals) upheld the classification under Tariff Item 68, but he held that the classification could be changed only prospectively and on this ground he confirmed the demand for duty for the period from 14-12-1984. Against the Collector (Appeals)'s order, the Revenue has filed this appeal so far as the rejection of the demand for the period prior to 14-12-1984 is concerned. The respondents have filed the cross-objection challenging that part of impugned order of the Collector (Appeals) which relates to classification of the products under Item 68 and demand for duty from 14-12-1984 onward.
2. For the Revenue, Shri Sunder Rajan has argued that the show cause notice under Section 11-A of the Central Excises & Salt Act, 1944 was issued on 19-3-1985 for the period from 1-9-1984 to 31-12-1984. Therefore, the period from 1-9-1984 to 18-9-1984 is beyond the period of six months. A demand for duty could be raised under Section 11-A of the Act ibid for a period of six months even after the classification list was approved and in the circumstances mentioned in the proviso to Section 11-A(1) of the Act, viz., suppression of facts and wilful mis-statement etc., demand for duty could be raised even for a period beyond six months. In support of this argument, he has relied on the judgments reported in 1988 (35) ELT 605 (S.C.), 1988 (38) ELT 573 (S.C.), 1988 (38) 571 (S.C.), 1989 (40) ELT 276 (S.C.), 1985 (22) ELT 751 (Karnataka), 1989 (40) ELT 102 (Tribunal) and 1988 (38) ELT 523 (Tribunal). He has argued that the order of the Collector (Appeals) in confining the demand for duty to the period from 14-12-1984 onward is contrary to the aforesaid judgments. The learned advocate for the respondent-assessee has tried to distinguish the above judgments. He has argued that the judgment reported in 1989 (40) ELT 276 (S.C.) did not deal with classification. The issue was the admissibility of exemption under notification and whether value of Tariff Item 68 goods should be included in the computation of the value of clearances. He has argued that in 1988 (38) ELT 573 (S.C.) Supreme Court has upheld the Tribunal's view that classification cannot be re-opened by the Assistant Collector. The learned advocate has stated that in 1988 (38) ELT 571 (S.C.) there was no dispute of classification and it related to admissibility of Notification No. 80/80-CE. He has argued that in view of paragraph-8 of this judgment, the Department is not estopped from taking a view prospectively. So, without amending the classification demand for six months cannot be raised. There was no non-levy or short-levy because of the approved classification list. He has also argued that the Tribunal's decision reported in 1988 (38) ELT 523 (Tribunal) dealt with set-off under Notification No. 201/79-CE. According to him, demand for duty could not be raised even for six months after the classification list was approved. He has relied on the following decisions :-
(i) 1985 (22) ELT 487 (Tribunal) - Steel Authority of India Limited v. Collector of Central Excise, West Bengal;
(ii) 1986 (23) ELT 318 (Delhi) - Ajanta Iron & Steel Co. (P) Ltd. v. Union of India;
(iii) 1986 (25) ELT 94 (Tribunal) - Collector of Central Excise, Chandigarh v. Gurmukh Singh & Sons, Ludhiana; and
(iv) 1983 ELT 34 (Madras) - Indian Organic Chemicals Ltd. v. Union of India and Ors.
The learned advocate has argued that the classification could be changed from 1-1-1985 as the revised classification list was filed by the respondent under protest on 26-12-1984 effective from 1-1-1985.
3. The law on the point whether demand for duty can be raised under Section 11-A of the Central Excises & Salt Act, 1944 is now well-settled in view of the following judgments of Supreme Court :-
(i) 1988 (35) ELT 605 (S.C.) - Tata Iron & Steel Co. Pvt. Ltd. v. Union of India (Decided on 6-5-1988) In this case, right from 1982 the appellant was filing classification list containing the description of the items manufactured by them and showing them liable to payment of excise duty only under Item 26AA (ia) of the CET and these lists were accepted and approved by the excise authorities. The Hon'ble Supreme Court held that it could not be said that the appellant was guilty of any suppression or mis-statement of facts, fraud, collusion or contravention of provisions of Excise Act. In view of this, it was held that the period of limitation would clearly be only six months and the extended period of five years was inapplicable. In this connection paragraph-7 of the judgment is reproduced below :-
"7. Regarding the question of limitation, the dispute is whether, assuming that the demand made by the Collector was valid, what is the period to which it could relate, it being common ground that as far as composite units comprising wheels, tyres and axles supplied by the appellant to the Indian Railways are concerned the demand under Item No. 68 of the Central Excise Tariff was justified. The question here is as to whether that demand could extend only to six months prior to the service of the show cause notice as contended by the appellant or upto a period of five years prior to that notice as contended by the respondent. In this regard, Section 11A is the relevant provision. The said section has been amended in 1978, but we are not concerned with that amendment. A perusal of Sub-section (1) of that Section shows that where any duty of excise has not been levied or short levied or short paid or erroneously refunded, the Central Excise Officer concerned may, within six months from the relevant date, serve notice on the person chargeable with that duty. This provision would clearly show that the period for which the demand could be made was only six months prior to the service of the notice. Now, in the present case, it has been found by the High Court and, in our opinion, rightly, that there was no suppression or mis-statement of facts or fraud by the appellant to which the alleged short levy or non-levy could be attributed. In fact, it is common ground that right from 1962 the appellant was filing classification lists containing the description of the items and showing them as liable to the payment of excise duty only under Item No. 26AA(ia) and these lists were accepted and approved by the excise authorities. In these circumstances, we fail to see how it could be said that the appellant was guilty of any suppression or mis-statement of facts or collusion or violation of the proviso of Central Excise Act as contemplated under the provision to Section 11A of the said Act. In view of this, the period of limitation would clearly be only six months prior to the service of the show cause notice. The demand for excise duty against the appellant on the said composite units under Item No. 68 of the Excise Tariff, to the extent that it exceeds the period of six months prior to the service of the show cause notice must, therefore, be struck down."
(ii) 1988 (38) ELT 573 (S.C.) - Collector of Central Excise, Baroda v. Kosan Metal Products Ltd. (Decided on 26-10-1988) In this case, classification list filed by the assessee was approved. Central Excise duty was paid according to the approved classification list availing of the benefit of set-off of duty paid on the inputs as stipulated under Notification No. 178/77-C.E. dated 18-6-1977. The range Superintendent pointed out short payment of duty of Rs. 38,460.12 on RT-12 returns for the months of April, 1979 and August, 1979. A show cause notice dated 19-1-1980 was issued to the assessee by the range Superintendent requiring it to explain why duty amounting to Rs. 51,261.88 for the period from 24-7-1978 to 31-3-1979 should not be recovered from it under Rule 10 of the Central Excise Rules and why penalty should not be imposed under Rule 173Q. The Hon'ble Supreme Court held that as proper notice was not issued, merely on the ground of short entry in RT-12 return, Section 11-A of the Central Excises & Salt Act would rot be attracted and that when in such circumstances a demand is made under the Act for recovery then such demand must be under Section 11-A of the Act. There was no fraud, collusion or wilful mis-statement or suppression of facts on the part of the assessee. Therefore, the Hon'ble Supreme Court held, Section 11-A clearly applied to the facts of the case.
(iii) 1988 (38) ELT 571 (S.C.) - Elson Machines Pvt. Ltd. v. Collector of Central Excise. (Decided on 15-11-1988) In this case, the assessee availed of the benefit of Notification No. 80/80-C.E. dated 19-6-1980. The Department issued show cause notice demanding duty on the ground that based on the value of clearances, the benefit of notification was not admissible to the assessee. The demand was confirmed and the matter came before the Tribunal. The Tribunal dismissed the assessees' appeal. The decision of the Tribunal was challenged before the Supreme Court, who upheld the Tribunal's decision and dismissed the assessee's appeal. A submission was made before the Supreme Court that the classification list had been approved earlier and the excise authority was estopped from taking a different view. Hon'ble Supreme Court held :-
"Plainly there can be no estoppel against the law. The claim raised before us is a claim based on the legal effect of a provision of law and, therefore, this contention must be rejected." (Ref. para 7 of the judgment)
(iv) 1989 (40) ELT 276 (S.C.) - Collector of Central Excise v. Chemphar Drugs & Liniments (Decided on 14-2-1989) In this case, the assessee submitted classification lists from time to time showing the various products manufactured by it including t lose falling under Items No. 14E and No. 68 of the CET. The Central Excise Officer visited the factory as was seen from the survey register at the factory and took note of the various products manufactured by the assessee. In view of this, the Tribunal took the view that longer time-limit of five years could not be invoked by the Department for raising demand for duty under Rule 10 of the Central Excise Rules and proviso to Section 11-A(1) of the Central Excises & Salt Act, 1944. Hon'ble Supreme Court observed that the Department had the knowledge of the products and there was no suppression of facts warranting application of five years' limitation for raising demand for duty. It was held by the Supreme Court in para-9 of the judgment that in view of the requirement of Section 11A of the Act, the claim for duty had to be limited for a period of six months as the Tribunal did.
3.1 In view of the ratio of the aforesaid four judgments of the Hon'ble Supreme Court, we hold that even in cases where duty has been paid in terms of approved classification, demand for duty can be raised under Section 11-A of the Central Excises and Salt Act, 1944 for a period of six months, or for a period of five years where there is fraud, collusion, wilful mis-statement or suppression of facts on the part of the assessee. In this case, the Department has not made out a case for application of longer time-limit. The demand for duty should, therefore, be limited to a period of six months prior to the issue of the show cause notice. Accordingly, the impugned order is modified to this effect.
3.2 In view of the Supreme Court judgments discussed above, the decisions of the Tribunaltelied on by the learned advocate do not hold good. The distinction sought to be made by him cannot also affect the ratio laid down in the judgments of the Supreme Court.
4. On the classification of the disputed products, the learned Departmental Representative has argued that these products are not derived directly from refining crude petroleum. Refining of crude petroleum means the first product obtained by refining of crude petroleum. The products in dispute in this case are derived from cracking raw naptha. According to definition at page 886 of The Condensed Chemical Dictionary by Gessner G. Hawley, Tenth Edition (Revised), refining is removal of unwanted materials. Cracking is different from removing unwanted materials. Hence, these products could not be classified under Tariff Item 11-AA(2). These were correctly classifiable under Item 68 of the erstwhile Central Excise Tariff. Accordingly, the benefit of Notification No. 276/67-C.E. dated 21-12-1967 was not admissible. He has argued that the Tariff Entry 11-AA(2) read as "other petroleum gases and gaseous hydrocarbons derived from refining of crude petroleum or shale". Ethylene, propylene and butadiene which are cleared in liquid state are not covered by this Entry. He has argued that on the point of classification the case is fully covered in favour of Revenue by the judgment dated 3-11-1970 of Gujarat High Court in the Special Civil Application No. 1175 of 1970 (Mehta Brothers v. M.P. Dwivedi or his successor in Office Superintendent, IOC Range Division No. 11, Central Excise Office, Ahmedabad and others) and this Tribunal's decision in Nav Bharat Industries (P) Ltd. v. Collector of Customs, Madras, reported in -1983 ELT 1134 (Tribunal). He has stated that these are the only two judgments on the issue and there is no contrary judgment. These judgments clinch the issue.
5. The learned advocate has argued that raw naptha is manufactured by the oil refineries from crude petroleum by the primary process of fractional distillation. The respondents have been declared by the Government as a refinery under Rule 140(2) of the Central Excise Rules, 1944. They obtain raw naptha from the oil refineries and out of that raw naptha they derive hydrocarbon gases, viz., ethylene, propylene and butadiene by the secondary process of thermal cracking. The product derived from a cracking process is in effect a synthetic crude oil, as stated at pages 180 to 182 of Encyclopedia Britanica. The respondents were classifying these 3 products under Tariff Item 11-AA and were availing of the benefit of exemption from duty under Notification No. 276/67-C.E. for long 18 years and the Department accepted that classification. Then, on the basis of a tariff advice, the Department sought to change the classification from Tariff Item 11-AA(2) to Item 68 on the ground that the impugned products were not derived directly from crude petroleum and hence these were not classifiable under Tariff Item 11-AA(2). Relying on the dictionary meaning of the expression "derived from" he has argued that this expression cannot be equated to "manufactured from" as has been done by the Department. He has argued that the hydrocarbon gases cannot be derived directly from crude petroleum. These cannot be obtained by one stage process. At least there should be two processes, viz., first, the process of deriving raw naptha from the crude petroleum by fractional distillation process and then obtain hydrocarbon gas from the raw naptha by the process of cracking the raw naptha. He has argued that as per page 787 of the Dictionary of Science and Technology by W.R. Chambers, the source of naptha is crude petroleum, coal tar or shale. If hydrocarbon gas is obtained from coal tar or alcohol, then that gas will not fall under Tariff Item 11-AA(2). The original source should be crude petroleum and this is the guiding factor for classification under Item 11-AA(2). He has argued that the Notification No. 276/67-CE specifically exempts goods falling under Tariff Items 6 to 11AA produced in any premises declared to be a refinery under Rule 140(2) of the Central Excise Rules, but specifically excludes goods under the above items produced in a refinery wherein crude petroleum is refined. This exemption notification covers goods which are manufactured in a refinery other than a refinery wherein crude petroleum is refined. Thus L.P.G. falling under sub-item (1) of Item 11AA is not covered by this notification as L.P.G. is only produced by the Oil Refineries. He has argued that if the products falling under Item 11-AA(2) also must be manufactured by a refinery which refines crude petroleum, then no product covered by Item 11AA would be exempted by virtue of Notification No. 276/67-C.E. Such a construction would destroy the benefit given by the notification. Such a construction which leads to inconsistency or repugnancy must be avoided. In this connection, he has cited Supreme Court judgments, reported in AIR-1969-SC-1048 at pages 1052 and 1053 and AIR -1979 - SC -1049 at pages 1054 (para 9).
6. The learned advocate has argued that the facts in the case of Nav Bharat Enterprises v. Collector of Customs -1983 ELT 1134 (supra) are distinguishable from the facts of the present case as in the said case liquid paraffin was involved and it is not derived from the refining of crude petroleum. Ho has also argued that the judgment of Gujarat High Court in the case of Mehta Brothers is also not applicable here as M/s. Mehta Brothers were not declared to be a refinery and the process was not a process of refining. He has also argued that the High Court's observation, "a product to be excisable under Item 11-A must be the immediate result of refining crude petroleum" is of the nature of obitor and hence the same should not be followed.
7. The learned advocate has stated that the respondents liquefy the hydrocarbon gases for convenience of transport. 50% of the gas produced is supplied by pipe line to the customer in gas form. At least this quantity cannot be said to have been cleared in liquefied form.
8. On the question of classification, the point for decision is whether a product for the purpose of classification under Tariff Item 11-AA(2) should be derived directly from refining of crude petroleum. This point is conclusively decided by Gujarat High Court in the case of Mehta Brothers in the Special Civil Application No. 1175 of 1970, which has been cited by the learned DR. This judgment was followed by this Tribunal in the case of Nav Bharat Enterprises which has also been relied on by the learned DR. In the case of Mehta Brothers, the Hon'ble High Court examined the scope of Item 11-A of the Central Excise Tariff as it existed during the relevant period. The said Tariff Item read, "all products derived from refining of crude petroleum or shale (whether gaseous, liquid, semi-solid or solid in form) not otherwise specified including refinery gases, lubricating oil and greases, waxes and coke". The tariff Item 11-AA(2) which is in dispute before us says "other petroleum gases and gaseous hydrocarbons derived from refining of crude petroleum or shale". Both these tariff items say "derived from refining of crude petroleum". While interpreting Tariff Item 11-A (supra), the Hon'ble Gujarat High Court has categorically held that "A product to be excisable under Item 11-A must be the immediate result of refining of crude petroleum". This is the ratio laid down by the High Court in that case. It is not an obitor. This ratio has been followed by this Tribunal in the case of Nav Bharat Enterprises (supra). No contrary judgment has been brought to our notice. In the circumstances, we have to follow the ratio of that judgment. In the present case, the respondents' products ethylene, propylene and butadiene were not derived directly from the crude petroleum, but the same were obtained from raw naptha - purchased from the oil refineries. In terms of the ratio of the above judgment, the respondents' products would not fall under Tariff Item 11-AA(2), but would be classifiable under Tariff Item 68 as contended by the Revenue. Consequently, the exemption under Notification No. 276/67-C.E. dated 21-12-1967 was not admissible.
9. In the light of the foregoing discussion, we allow the appeal of the Revenue and dismiss the cross-objection.