Crude oil cess liability turns on quantity actually received in the refinery; unsupported short-payment demand and penalties failed.

Cess on crude oil under the Oil Industry (Development) Act, 1974 was payable with reference to the quantity actually received in the refinery, as Section 15 directs collection on that basis and Section 2(e) defines crude oil in its natural stage after removal of water and foreign substances. In closed pipeline supplies, the quantity was measured only after receipt and settling in the refinery, and in other supplies an average water factor was applied with certification of the quantity actually received. As the record did not show payment on a lesser quantity than what was actually received, the department failed to establish short-payment under the Act. The demand of cess and the connected penalties were therefore not sustainable and were set aside.

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Issues: Whether cess on crude oil under the Oil Industry (Development) Act, 1974 was payable on the quantity actually received in the refinery, and whether the demand and penalties were sustainable.

Analysis: Section 2(e) defines crude oil as petroleum in its natural stage after extraction of water and foreign substances, and Section 15 directs collection of duty of excise on the quantity received in a refinery. The record showed that in closed pipeline supplies the quantity was measured only after receipt and settling in the refinery, while in other supplies an average water factor was applied and the receiving refinery certified the quantity actually received. There was no finding that cess had been paid on a quantity lesser than what was actually received in the refinery, and the department's case did not establish any short-payment on the basis required by the Act.

Conclusion: The demand of cess and the connected penalties were not sustainable and were set aside in favour of the assessee.

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