2024 (5) TMI 145 - AT - Customs

Waste Oil Misclassified as Crude, No Extra Duty Owed; Tribunal Overturns Order, Recognizes Duty Already Paid.

The Tribunal set aside the impugned order, allowing the appeal. It concluded that the waste/slop oil, predominantly water, cannot be classified as crude ... Demand of custom duty and imposition of penalty - non payment of duty on slop/waste Oil of foreign origin - cleaning the inner walls of the tanker by applying water with the help of a pressure jet - HELD THAT:- The oil obtained by cleaning the tanker is pre- dominantly mixed with water. Only approximately 10% is oil and 90% is water. In this position, the waste oil/slop oil cannot be classified as crude oil under heading 2710 in terms of chapter note 3 of chapter 27 which prescribes that the petroleum product should contain more than 50% by weight of benzene, toluene, xylene or naphthalene whereas in the present case the oil content is only 10% and 90 is water, therefore demanding duty considering that product as crude oil is not correct. Without prejudice to above, we further find that it is admitted fact that while converting the vessel from foreign going to coastal run, the custom duty of Rs. 6,95,546/- was paid in regard of the entire quantity of foreign origin oil irrespective whether the subsequently same would be cleaned from the inner walls of the tank by applying water through pressure jet or collected in form of waste/ slop oil from the vessels for clearance , therefore, no custom duty can be demanded for the second time. On this fact, on the waste oil/slop oil duty cannot be demanded twice as the same goods have already suffered the custom duty while converting from foreign going vessels to coastal vessels. Accordingly, we are of the view that in the present case the demand of custom duty, interest and penalty are not sustainable. Hence, the impugned order is set aside. Appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether oil-containing slop/waste recovered from vessel tanks by pressure-water cleaning is liable to customs duty as imported/chargeable goods. 2. Whether the recovered slop/waste oil can be classified under chapter/heading 2710 (petroleum oils) having regard to chapter note 3 (requirement of predominance of specified hydrocarbons) where the mixture is predominantly water. 3. Whether customs duty can be demanded a second time on the same goods where duty was earlier paid on conversion of a foreign-going vessel to coastal-run status covering the same quantity. 4. Whether a demand for duty, interest and penalty is sustainable where the recovered material has no commercial value and was dispatched to an authorized waste re-processor. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability of recovered slop/waste to customs duty Legal framework: Customs liability attaches to dutiable goods as defined by the Customs Act and the Customs Tariff. Liability depends on whether goods constitute imported/chargeable goods and their classification and valuation. Precedent Treatment: The judgment does not apply or distinguish specific binding precedents on liability but refers to established principles that duties cannot be levied on the same goods twice. Interpretation and reasoning: The Tribunal accepted the factual finding that the material in question was not imported as slop/waste but was produced in situ during cleaning - a mixture obtained by applying water jets to inner tank walls. The composition was found to be approximately 10% oil and 90% water. On this factual basis the Tribunal held that the material did not constitute the dutiable goods for which the department sought to levy duty as if the goods were crude petroleum or a petroleum-derived product. Ratio vs. Obiter: Ratio - where material recovered from tanks is a water-dominated mixture produced during cleaning, it does not qualify as the petroleum product sought to be taxed as imported/chargeable goods. Conclusion: Duty cannot be sustained on the recovered slop/waste as treated by the department under the facts of the case. Issue 2 - Classification under chapter/heading 2710 Legal framework: Chapter note 3 to chapter 27 (tariff) sets out composition criteria for classification of petroleum products; classification depends on the predominance by weight of specified hydrocarbons or constituents. Precedent Treatment: No specific precedents were relied upon in the reasoning on this point; the Tribunal applied the statutory/chapter note test to the facts. Interpretation and reasoning: The Tribunal applied chapter note 3 and factual composition. Given that the recovered mixture comprised only about 10% oil and 90% water, it failed the predominance test required for classification under heading 2710. The Tribunal concluded that the mixture could not be classified as crude oil or a petroleum product within heading 2710 because the oil/organic fraction did not exceed 50% and did not meet the chapter note composition threshold. Ratio vs. Obiter: Ratio - a recovered mixture containing less than the required proportion of petroleum constituents cannot be classified under chapter/heading 2710; classification must follow the composition test in chapter notes. Conclusion: Classification under heading 2710 was incorrect; the demand premised on that classification is unsustainable. Issue 3 - Double liability where duty previously paid on conversion of vessel Legal framework: Customs duty is leviable on goods once they have been subjected to chargeable importation/clearance; principles of non bis in idem (no double taxation of same goods) and attribution of duty already paid apply. Precedent Treatment: The Tribunal relied on the admitted factual matrix rather than citing authority; it applied the logical principle that goods which have already been charged to duty cannot be taxed again on the same quantity. Interpretation and reasoning: It was an admitted fact that during conversion of the vessels from foreign-going to coastal status, customs duty in respect of the entire quantity of foreign-origin oil had already been paid (Rs. 6,95,546). The Tribunal reasoned that the oil subsequently recovered in the form of slop/waste represented the same goods (or the same chargeable quantity) which had already suffered duty in the conversion process. Therefore, imposing an additional duty on the recovered slop would amount to demanding duty twice on the same goods. Ratio vs. Obiter: Ratio - once the same goods have been subjected to customs duty (here, on conversion), a further demand of customs duty on materially identical goods recovered later is not permissible. Conclusion: The demand for duty in respect of the recovered slop/waste is barred to the extent it duplicates duty already paid during conversion; duty, interest and penalty based on a second demand are unsustainable. Issue 4 - Demand where recovered material has no commercial value and was treated as waste Legal framework: Customs valuation and liability principles turn on whether goods have commercial value and constitute dutiable goods; exemptions or non-liability may arise where material is waste with no marketability and removed/disposed to authorized recyclers. Precedent Treatment: The appellant invoked settled law that non-marketable waste, lacking commercial value, is not subject to customs duty; the Tribunal considered the documentary record (letter stating no commercial value) and the fact of authorized disposal. Interpretation and reasoning: The Tribunal accepted documentary evidence that the slop/waste had no commercial value and was dispatched to authorized waste recyclers/re-processors. Given the absence of marketability and the nature of the material as predominantly water with incidental oil, the Tribunal held that it was inappropriate to treat the material as dutiable commercial goods deserving of customs duty or additional customs duty. That factual and legal conclusion reinforced the decision to set aside the demand, interest and penalty. Ratio vs. Obiter: Ratio - where recovered material is demonstrated to be non-marketable waste and is disposed of to authorized waste processors, it is not properly subject to customs duty as commercial goods. Conclusion: Duty, interest and penal consequences predicated on treating the recovered slop as marketable dutiable goods are unsupportable. Ancillary - Penalty and interest Legal framework: Penalty and interest flow from imposition of duty and findings of default; if main demand is unsustainable, ancillary monetary consequences fall with it unless separate culpability established. Interpretation and reasoning: Having concluded that the duty demand was unsustainable on classification, composition and prior payment grounds, the Tribunal held that interest and penalty imposed under Section 114A (customs penalty) could not stand in the absence of a valid duty demand. Ratio vs. Obiter: Ratio - where the principal duty demand is invalid, consequential interest and penalty imposed solely on that invalid demand are also unsustainable. Conclusion: Interest and penalty confirmed by the adjudicating authority are set aside along with the duty demand. Disposition The impugned order confirming demand of customs duty, interest and penalty was set aside; the appeal was allowed on the combined grounds of incorrect classification, factual composition showing predominance of water, prior payment of duty on conversion, and absence of commercial value of the recovered material.