2025 (11) TMI 133 - AT - Customs

Importer's oil classification reclassified to petroleum and rubber process oils; valuation uplift sustained, confiscation, penalty under Section 112(a) set aside

CESTAT held the importer's classification of imported oils as CTH 2803 was incorrect and affirmed reclassification to petroleum oils-Base Oil (CTH ... Demand of differential duty consequent to re-classification and re-determination of value - imposition of penalty under Section 112(a) of the Customs Act, 1962 - mis-declaration of imports as CBFS instead of ‘Base Oil’, ‘Rubber Process Oil’ and ‘Off-specification Products’ - classification adopted by the Assessee for the imported goods is correct or not - Confiscation - penalty - HELD THAT:- The assessee has imported the products and declared as Carbon Black Feed Stock. The standard chemical literature indicates that the Carbon Feed Stock is a petroleum-based oil fractions used as a primary raw material for manufacture of Carbon Black. It is essentially a complex mixture of higher hydrocarbons, including polyaromatic compounds like naphthalene and anthracene obtained through high temperature cracking of petroleum fractions. CBFS is a dark coloured viscous liquid consisting primarily of C12 and higher-weight components. It contains various aromatic compounds including naphthalene, methyl-indenes, anthracene and fluorene. It is produced as a bye-product of catalytic cracking process in oil refineries. Whereas Chapter 28 of the Customs Tariff Act deals with inorganic chemicals, organic or inorganic compounds of precious metals, etc. The classification of the imported goods adopted by the assessee under CTH 2803 is not correct. CBFS is the raw material for manufacture of Carbon Black and not Carbon Black itself. In the manufacture of Carbon Black, CBFS is used but the classification of CBFS is to be done under Chapter 27 of the Customs Tariff Act as petroleum oils and oils obtained from bituminous minerals (other than crude) and preparations not elsewhere specified or included. As such, the classification adopted by the assessee for imported item under CTH 2803 is wrong. From Carbon Black Feed Stock, Carbon Black is manufactured which is classifiable under CTH 2803. Applying the Rule of Interpretative Notes to the Customs Tariff, the imported goods are more appropriately classifiable as Base Oil in respect of 311 Barrels under CTH 27101960 and for other remaining oils as Rubber Process Oil under CTH 27075000. The test reports taken note of which have indicated that some of these oils are Off Specification products and also specification for Rubber Process Oil as to kinematic viscosity is not satisfied. All imported goods are required to be classified in terms of Section Notes, Chapter Notes and Chapter Heading applying the Interpretative Notes to Customs Tariff Act taking assistance from Explanatory Notes to HSN wherever required - the classification of the imported goods as specified in the impugned Order-in-Appeal No. 68/2020-TRY (CUS) dated 19.10.2020 does not call or any interference. The issue of classification is thus decided against the Assessee and in favour of the Department. Enhancement of the values - HELD THAT:- The usage of the imported goods or even its nomenclature whether as RPO or Off Specification or CBFS will not be determining factors either for classification or valuation in the background of the facts obtaining in this case. There are no merit in the Assessee’s contention that the Lower Adjudicating Authority had adopted the higher of the NIDB Data as the basis was intimated to the Assessee on enhancement of the values and it was only one Bill of Entry each for Base Oil and RPO. Confiscation and penalty - HELD THAT:- Some of the chemical test reports clearly indicate that Off Specification Oils can be treated as CBFS if used for the manufacture of Carbon Black. The Assessee is found to be a trader and also reportedly involved in the manufacture of lubricants. It was repeatedly submitted that the imported oils were meant for their actual use and not for sale. As such alleging that the importer had intentionally mis-declared the description and classification to evade Customs Duty is not supported. As such, confiscation and penalty imposed are not sustainable. There are no reason to interfere with the order of the Lower Appellate Authority both on the issues of classification of the imported products or on the valuation adopted. The Appeal of Revenue dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the imported goods declared as 'Carbon Black Feed Stock' (CBFS) were mis-declared in description and thereby liable to re-classification under the Customs Tariff Act. 2. Whether the classification adopted by the importer (Chapter 28/HTS 2803) was correct or whether the goods are classifiable under petroleum/ mineral oil headings (Chapter 27: e.g., sub-headings 2710 1960 / 2707 5000) and the legal tests for choosing the correct heading. 3. Whether the proper value of the imported goods could be enhanced on the basis of contemporaneous NIDB data and whether the Valuation Rules (including Rule 4/5 of the Customs Valuation Rules, 2007) and the onus of proof were properly applied. 4. Whether confiscation and penalties (Sections 112(a), 114AA and redemption fine) were justified, having regard to alleged substitution of samples, intent to evade duty, proportionality of penalty, and the burden of proof for mis-declaration/substitution. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Correctness of declared description (CBFS) and allegation of mis-declaration Legal framework: Classification under the Customs Tariff Act is governed by chapter/heading/sub-heading descriptions and General Interpretative Rules (GIRs), notably Rule 3 concerning specific headings and essential character of mixtures; tests of end-use and chemical composition inform classification where headings overlap. Precedent treatment: Parties relied on authorities concerning onus of proof and technical disclosure obligations; the Tribunal considered those precedents but applied them to factual chemical reports. Interpretation and reasoning: The Tribunal analysed CRCL test reports (six representative samples) which revealed that the consignment comprised base oil, rubber process oil (RPO) and off-specification oils; CRCL noted absence of an Indian standard for CBFS and expressly stated that certain off-specification oils could be termed CBFS only if actually used in carbon black manufacture. The Tribunal applied GIR 3 (preference for the most specific heading; mixtures classified by essential character) and chemical/HSN explanatory notes to conclude that the imported oils are essentially petroleum-based oils falling under Chapter 27, not Chapter 28 (inorganic/organic chemicals). The finding that CBFS is a petroleum fraction/raw material but not itself carbon black was emphasised to distinguish the importer's Chapter 28 classification as incorrect. Ratio vs. Obiter: Ratio - classification must follow chemical nature and essential character; GIR 3 governs choice of heading. Obiter - observations on commercial nomenclature of 'CBFS' as terminology in trade. Conclusion: The Tribunal affirmed re-classification of 311 barrels as base oil under 2710 1960 and the remainder as RPO/off-spec under 2707 5000; the importer's classification under 2803 was rejected. Issue 2 - Valuation enhancement and application of Valuation Rules (Rule 4/5 and NIDB data) Legal framework: Customs Valuation Rules, 2007 (including Rule 4 regarding use of transaction values of contemporaneous identical/similar imports and Rule 5 where technical characteristics must be disclosed before reliance on alternate methods); onus on Customs to establish that declared value is not correct. Precedent treatment: The importer relied on the Supreme Court authority that onus remains on Customs to establish value and on a Tribunal decision requiring disclosure of technical characteristics before invoking Rule 5. The Tribunal considered these but treated the factual matrix and documentary evidence as determinative. Interpretation and reasoning: The Tribunal found that the Department had disclosed the basis of enhancement in the Show Cause Notice (use of NIDB contemporaneous imports). The Tribunal rejected the contention that the highest NIDB value was arbitrarily adopted or that Rule 4 required adoption of the lowest value - noting that valuation must be based on contemporaneous transactions of identical or similar goods of substantially the same quality at the same commercial level; the Department applied NIDB data in that context. The Tribunal did not find deliberate mis-valuation by the Department warranting interference, and accepted the Lower Appellate Authority's affirmation of classification and valuation adjustments. Ratio vs. Obiter: Ratio - valuation may be enhanced on contemporaneous NIDB data where Customs gives the basis and the goods are found to be different from declared description; disclosure in notice and factual comparability are key. Obiter - discussion of competing case law was not followed to reverse factual findings. Conclusion: The Tribunal did not interfere with the order of the Lower Appellate Authority on valuation; the enhanced values based on NIDB contemporaneous import data were sustained. Issue 3 - Confiscation, sample-substitution allegation, and penalties (Sections 112(a), 114AA and redemption fine) Legal framework: Penal provisions and confiscation require proof of deliberate mis-declaration, intent to evade duty or active collusion; Section 114AA concerns substitution/ tampering of samples and attracts significant penalty where proven; principles of proportionality apply to penalty quantification. Precedent treatment: The importer invoked precedents on onus and disclosure; the Tribunal addressed allegations against departmental officers and the evidence on substitution. Interpretation and reasoning: The Tribunal examined the record of sampling, CRCL correspondence and cross-examination. The untested earlier sample was returned to CRCL for improper sealing and thus could not substantiate substitution. When inventory and 100% examination were later carried out (per High Court directions), no evidence of dark viscous oil (as alleged in the initial suspicion) was found; sampled goods varied in colour (green, yellow, brownish-green). The Tribunal concluded that substitution of samples was not proved; the Department's suspicion by an Assistant Commissioner was not supported by factual inventory and chemical testing. On confiscation and penalties under Sections 112/114AA, the Tribunal distinguished between technical/interpretative mis-classification (which does not ipso facto prove evasion) and proven intentional mis-declaration or sample tampering. Given absence of evidence of intent or proven substitution, confiscation and severe penalties were unsustainable. The Tribunal also applied proportionality and the appellate authority's reduction/setting aside of penalty under Section 114AA was upheld. Ratio vs. Obiter: Ratio - penalty and confiscation require proof of intentional mis-declaration or tampering; mere differences in technical classification do not establish culpable intent. Obiter - remarks on departmental procedural lapses in sampling. Conclusion: Penalty under Section 114AA (and confiscation/penalties under Section 112/114AA to the extent reflecting alleged substitution and intent) were set aside or reduced; the Revenue's appeal against setting aside Section 114AA penalty was rejected. Redemption fine and other penalties imposed by original adjudicating authority were moderated in appellate proceedings and further interference by the Tribunal was limited to removing confiscation/penalties not supported by evidence. Resultant Disposition (cross-reference) The Tribunal affirmed the Lower Appellate Authority on classification and valuation (no interference). The Tribunal rejected the Revenue's challenge to setting aside penalty under Section 114AA and upheld the appellate finding that substitution was not proved; confiscation and penal orders predicated on intentional mis-declaration or sample tampering were set aside. The appeal by the importer was partly allowed (classification/valuation against importer upheld in favour of Department but penalties/confiscation set aside), and the Revenue's appeal was rejected.