Crude degummed soyabean oil not agricultural product despite soyabean origin due to manufacturing transformation

The SC held that crude degummed soyabean oil is not an agricultural product despite being derived from soyabean. The Court determined that the manufacturing process transforms soyabean into a distinct commodity with different character and identity. Administrative circular No. 10/2004-Cus. could not legally expand the exclusionary clause of statutory notification No. 53/2003-Cus. by including all products of agricultural origin, as this would constitute impermissible legislation by circular. The appellant was entitled to duty free credit entitlement scheme benefits under the notification. Appeal allowed.

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1. ISSUES PRESENTED and CONSIDERED

- Whether the administrative circular No. 10/2004-Cus. dated 30.01.2004 could legally expand the exclusionary clause of the statutory notification No. 53/2003-Cus. dated 01.04.2003 by including all products derived from agricultural or dairy origin, thereby curtailing the benefits under the duty free credit entitlement scheme.

- Whether crude degummed soyabean oil imported by the appellant qualifies as an agricultural product under the relevant statutory and policy framework.

- Whether the process of converting soyabean into crude degummed soyabean oil amounts to manufacture, resulting in a new and distinct product.

- Whether the imported crude degummed soyabean oil has the requisite nexus with the products exported by the appellant under the EXIM policy for entitlement under the duty free credit certificate.

- The validity of the demand of customs duty and interest imposed on the appellant by the Assistant Commissioner and upheld by the High Court.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of Circular No. 10/2004-Cus. expanding the exclusionary clause of Notification No. 53/2003-Cus.

Relevant legal framework and precedents: Notification No. 53/2003-Cus., issued under Section 25(1) of the Customs Act, exempts certain goods imported under duty free credit entitlement certificates from customs duty, explicitly excluding agricultural and dairy products. Circular No. 10/2004-Cus. clarified that the exclusion includes all products derived from agricultural or dairy origin, including crude edible oil. The appellant challenged this circular as impermissibly expanding the exclusion.

Precedents such as Tata Teleservices Ltd. v. Commissioner of Customs and Union of India v. Inter Continental have established that an administrative circular cannot impose conditions or restrictions beyond those provided in a statutory notification, as that would amount to legislating by circular, which is impermissible. Similarly, Sandur Micro Circuits Ltd. reaffirmed that a circular cannot override or whittle down the effect of a statutory notification.

Court's interpretation and reasoning: The Court held that the circular, by expanding the exclusionary clause to include all products derived from agricultural or dairy origin, effectively curtailed the exemption granted by the statutory notification. This was not permissible as it amounted to rewriting the notification's conditions. Therefore, the circular had no legal effect to restrict the exemption beyond what was statutorily provided.

Application of law to facts: The Court concluded that the appellant was entitled to rely on the exemption as provided in the statutory notification and could not be denied benefits on the basis of the circular.

Conclusion: Circular No. 10/2004-Cus. dated 30.01.2004 could not legally expand the exclusionary clause in Notification No. 53/2003-Cus. and thus has no legal consequence in restricting the appellant's entitlement.

Issue 2: Whether crude degummed soyabean oil is an agricultural product

Relevant legal framework and precedents: The term 'agricultural product' is not defined in the EXIM policy or the Customs notification. The Court referred to dictionary definitions and judicial precedents concerning the meaning of 'agricultural product' and 'manufacture'. Key precedents include Union of India v. Delhi Cloth and General Mills Co., Deputy CST v. Pio Food Packers, Commissioner of Income Tax v. N.C. Budharaja & Co., and Jai Bhagwan Oil and Flour Mills v. Union of India.

These cases establish that for a product to be considered manufactured, it must undergo a process resulting in a new and distinct article with a different name, character, or use, recognized as such in trade. Conversely, simple or minor operations that do not produce a distinct new product do not amount to manufacture.

Court's interpretation and reasoning: The Court analyzed the manufacturing process of converting soyabean into crude degummed soyabean oil, which involves cleaning, cooking, flaking, solvent extraction, and distillation. The Court found that this process constitutes manufacture as it results in a new and distinct product, different in character and identity from the original soyabean.

The Court rejected the High Court's reasoning that crude degummed soyabean oil retains the identity of soyabean and is not fit for human consumption unless refined. The Court clarified that the test for manufacture is not whether the product is consumable but whether it is a distinct commodity recognized in trade.

Applying dictionary meanings and judicial interpretations, the Court held that crude degummed soyabean oil is not an agricultural product but a manufactured product distinct from soyabean, which is the agricultural raw material.

Application of law to facts: The process undertaken by the appellant meets the criteria for manufacture, and the resulting crude degummed soyabean oil is not the same as the agricultural product soyabean. Therefore, the exclusion of agricultural products under Notification No. 53/2003-Cus. does not apply to the imported crude degummed soyabean oil.

Conclusion: Crude degummed soyabean oil is not an agricultural product but a distinct manufactured commodity and thus eligible for exemption under the duty free credit entitlement scheme.

Issue 3: Nexus between imported goods and exported products under the EXIM policy

Relevant legal framework: The EXIM policy requires that goods imported under the duty free credit entitlement certificate must have a nexus with the products exported by the status holder. The appellant exported food products including soyabean meal extract and imported crude degummed soyabean oil.

Court's reasoning: The High Court had held that the imported crude degummed soyabean oil did not have a broad nexus with the exported products, particularly as the exported soyabean meal extract was different from the imported crude oil, and the latter was not fit for direct human consumption.

The Supreme Court, however, did not find it necessary to delve into this issue in detail, since the primary question of whether crude degummed soyabean oil was an agricultural product was dispositive. The Court noted that the imported product is classified as a food product under the Standard Input Output Norms (SION), as is the exported soyabean meal extract, indicating a nexus.

Conclusion: The Court did not make a definitive ruling on the nexus issue but implied that since crude degummed soyabean oil is a distinct product and classified as a food product, it does have the requisite nexus with the exported products.

Issue 4: Validity of the demand of customs duty and interest

Relevant legal framework: The Assistant Commissioner demanded customs duty and interest under Sections 28 and 28AB of the Customs Act on the ground that the imported crude degummed soyabean oil was an agricultural product excluded from exemption.

Court's reasoning: Since the Court held that the imported product is not an agricultural product and the circular expanding the exclusionary clause is invalid, the demand of duty and interest is unsustainable.

Conclusion: The demand of customs duty and interest raised against the appellant is set aside.

3. SIGNIFICANT HOLDINGS

"By way of the circular dated 30.01.2004, the Board could not have curtailed the benefits granted to the appellant under the statutory notification dated 01.04.2003 by expanding the scope of the exclusionary clause 'other than agricultural and dairy products'."

"The process carried out by the appellant using soyabean as raw material and ending in the product crude degummed soyabean oil is manufacturing."

"The true test for determining whether manufacture has taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in trade as a new and distinct commodity."

"Crude degummed soyabean oil is a product different and distinct in character and identity from soyabean."

"Crude degummed soyabean oil is not an agricultural product."

"Therefore, appellant would be entitled to the benefits under notification No.53/2003 dated 01.04.2003."

"The circular bearing No.10/2004 dated 30.01.2004 insofar it expands the exclusionary clause in the statutory notification No.53/2003 dated 01.04.2003 would have no legal consequence."

The Court allowed the appeal, set aside the impugned judgment and order of the High Court dated 05.08.2019, and the order passed by the Assistant Commissioner dated 09.01.2007, with no order as to costs.

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