2025 (11) TMI 829 - AT - Central Excise

Appeal allows reversal of higher excise demands; duty must be on each product by its classification and SKO price

Hindustan Petroleum Corporation Ltd. Versus Commissioner of Central Excise, Mumbai-II

CESTAT MUMBAI - AT allowed the appeal, setting aside the Commissioner (Appeals) order that had confirmed excise demands and penalties. The Tribunal held ... Liability to pay Central Excise duty on intermingled SKO with HSD/MS, at the higher of the two duties - duty payable on a SKO, not used for intended purpose of PDS and duty payable on surge/gain in HSD/MS, during the disputed of July, 2014 to March, 2015 - HELD THAT:- It transpires that the central excise duty is a levy on manufacture or production of excisable goods which are specified in the First and Second schedule to the Central Excise Tariff Act, 1985. Further, it also transpires from the definition given for the phrase ‘manufacture’ in terms of Section 2(f) the Central Excise Act, 1944, that any process incidental or ancillary to the completion of the manufacture product, or, any process which is specified in relation to any goods in the Section of Chapter notes of the First schedule to the Central Excise Tariff Act as amounting to manufacture, applied on the goods can also be subject to levy of central excise duty. Furthermore, it also transpires that the rate of duty at which a commodity is subjected for levy of Central Excise duty is determined as per the unique classification of such commodity under specific heading/sub-heading/tariff item provided under the First Schedule. On careful examination of the provisions of Section 3 of the Central Excise Act, 1944 it transpires that there is no legal provision for charging duty of excise at different rates on the same excisable goods. It is not in dispute that while clearing the goods, the appellants have cleared from the factory quantities of MS, HSD and SKO separately. Since all the three goods are supplied through a pipeline, the SKO get mixed with either MS or HSD. As per the provisions of Section 4 ibid, the excise duty is payable on the transaction value at the time of removal of the goods from the factory - In the present case, the goods cleared from the factory is MS/HSD and SKO. Accordingly, the duty on these products is payable as per price of the respective product prevailing at the time of removal of the goods. As regards MS and HSD, the duty was paid on the transaction value. As regards SKO, since the same was not sold but meant for Public Distribution System (PDS), the duty was paid on the prevailing price of SKO on the basis of sale price prevailing for SKO for industrial purpose, which is higher than the price of SKO sold under PDS. Therefore, the correct price was adopted by the appellant while clearing the intermix quantity of SKO. The dispute in the identical set of facts in the case of M/s Indian Oil Corporation Ltd., Vs. Commissioner of Central Excise in Service Tax, Guwahati [2019 (8) TMI 1910 - CESTAT KOLKATA], the Tribunal have held that duty on interface quantity of SKO cannot be demanded the rates applicable for HSD or MS. The impugned order dated 21.09.2016 passed by the learned Commissioner of Central Excise (Appeals), Mumbai Zone-II, in upholding the confirmation of the adjudged demands and imposition of penalties on the appellants by the original authority, is not legally sustainable. The impugned order passed by the learned Commissioner of Central Excise (Appeals) is set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether duty can be demanded on intermixed/interface quantities (transmix) of SKO with HSD/MS at the higher rate applicable to HSD/MS instead of the rate applicable to SKO cleared for PDS/industrial use, for removals during the period July 2014 to March 2015. 2. Whether intermixing/transmixing of SKO with HSD/MS in pipeline transportation amounts to 'manufacture' under Section 2(f) of the Central Excise Act, 1944, attracting excise duty on recharacterised product. 3. Whether a Board circular proposing application of HSD/MS price to interface SKO can override or modify statutory valuation/charging provisions contained in Sections 3 and 4 of the Central Excise Act and related tariff classification rules. ISSUE-WISE DETAILED ANALYSIS - I. Liability to pay excise on intermix/interface SKO at rates applicable to HSD/MS Legal framework: Central Excise Act, 1944 (Sections 3 and 4) and Central Excise Tariff Act, 1985 (First Schedule and Chapter/Heading/Sub-heading notes) govern levy, valuation and classification. Section 4 requires duty chargeable with reference to value on each removal; Section 3 levies duty on manufacture/production as per First/Second Schedules. Tariff headings and supplementary notes specify technical definitions and criteria for classification of SKO, HSD and MS. Precedent treatment: The Tribunal in a co-ordinate matter held that duty on interface SKO cannot be demanded at HSD/MS rates; that decision was affirmed by the Supreme Court (no interference). Other Tribunal benches and orders have also set aside similar demands. The Court/Tribunal relied on authorities holding that administrative circulars cannot alter statutory provisions. Interpretation and reasoning: The Tribunal examined the tariff classification and supplementary notes which require specific technical characteristics to qualify as HSD or MS. The record lacked evidence that intermixed SKO possessed the requisite characteristics of HSD/MS. Section 4 mandates valuation at transaction value at time/place of removal; the appellants had cleared SKO separately and paid duty according to applicable SKO/industrial pricing. There is no statutory provision allowing charging different rates on the same excisable goods at the point of removal based on subsequent intermixing during transit. The Board circular purporting to apply HSD/MS price to SKO lacks statutory backing and cannot create or alter the legal incidence of duty. Ratio vs. Obiter: Ratio - Where goods are removed separately from factory as SKO and MS/HSD and appropriate duty is paid on respective transaction values, subsequent intermixing during pipeline transportation does not permit reclassification or levy of higher duty applicable to HSD/MS on the SKO portion unless the intermixed product meets statutory/tariff specifications for HSD/MS. Obiter - Observations on practices and uniformity circulars are ancillary but support the primary conclusion. Conclusion: Differential duty demand on interface quantities of SKO by applying HSD/MS duty rates is not sustainable. The impugned demand confirmed on that basis is set aside. ISSUE-WISE DETAILED ANALYSIS - II. Whether intermixing/transmixing amounts to 'manufacture' Legal framework: Section 2(f) of the Central Excise Act defines 'manufacture' and includes processes incidental or ancillary to manufacture or processes specified in the First Schedule notes; clause (iii) applies only to goods specified in the Third Schedule. Precedent treatment: The Tribunal applied statutory text and prior decisions recognizing the limits of Section 2(f), and that processes not specified in the schedules or not meeting statutory criteria cannot be treated as manufacture for levy purposes. Interpretation and reasoning: The adjudicating authority relied on clause (iii) of Section 2(f) to treat intermixing as manufacture, but clause (iii) applies only to goods listed in the Third Schedule. The products at issue are not in the Third Schedule; thus clause (iii) is inapplicable. Further, there was no specific charge in the show cause notice that the act amounted to manufacture; adjudication going beyond the SCN is impermissible. The transient, technical necessity of interface formation during sequential pumping is a logistics/operational occurrence and not a transformative process amounting to manufacture as per statutory definition and tariff notes. Ratio vs. Obiter: Ratio - Intermixing during pipeline transfer does not constitute 'manufacture' under Section 2(f) where the statutory criteria (including Third Schedule specification) are not met and where the SCN does not charge such manufacture. Obiter - Remarks on operational necessity and industry norms are supportive but non-essential to the holding. Conclusion: Intermixing/transmix does not amount to manufacture under Section 2(f); no additional excise liability can be imposed on that ground. ISSUE-WISE DETAILED ANALYSIS - III. Validity and effect of administrative circulars vis-à-vis statutory charging/valuation provisions Legal framework: Statutory charging provisions (Sections 3 and 4) and tariff classification control levy and valuation; administrative circulars may clarify but cannot alter or enlarge statutory prescriptions. Precedent treatment: The Tribunal and higher courts have consistently held that Board circulars cannot create liabilities or change law contrary to statute; circulars are subordinate and cannot vitiate statutory provisions. Interpretation and reasoning: The impugned reliance on the Board circular to apply HSD/MS price to SKO lacks statutory foundation. Section 4 prescribes valuation principles at removal; where goods are removed as SKO and HSD/MS separately and transaction value is applied, a circular cannot reallocate valuation to apply a higher price for excise computation. The Tribunal cited authority establishing that administrative clarifications cannot contradict the statute or effect new legal obligations. Ratio vs. Obiter: Ratio - Administrative circulars cannot override statutory provisions on levy and valuation; therefore a circular proposing application of a different price for interface quantities is not binding if contrary to statute. Obiter - Comments on policy or uniformity aims of circulars are non-binding. Conclusion: The Board circular relied upon by the Department does not justify the differential demand; it cannot be applied to impose higher duty on interface SKO inconsistent with statutory valuation and classification. CONSOLIDATED CONCLUSION AND ORDER-MAKING RATIONALE Having regard to the statutory scheme, tariff classification requirements, absence of evidence that intermixed quantities met technical parameters of HSD/MS, the appellants' payment of duty on transaction value at removal, prior Tribunal decisions affirmed by the Supreme Court, and the principle that Board circulars cannot create substantive law, the confirmed demands and corresponding penalties premised on treating interface SKO as HSD/MS or as manufacture are unsustainable. The impugned appellate order confirming such demands is therefore set aside and the appeal allowed with consequential benefits, if any.