No extra excise duty on SKO-MS/HSD interface; mixed product not classifiable as MS/HSD under Section 4

CESTAT MUMBAI-AT held that the intermingled quantity of SKO with MS/HSD could not be classified as MS or HSD under the Central Excise Tariff, as there was no evidence that the mixed product acquired the characteristics of MS/HSD. Since MS, HSD, and SKO were cleared separately from the factory, duty was correctly paid on MS/HSD on transaction value and on SKO at the higher industrial SKO price, in terms of Section 4. Following precedent in a similar matter, the Tribunal ruled that additional duty on the interface quantity at MS/HSD rates was unsustainable. The demand of differential duty and consequential penalties were set aside, and the appeal was allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether intermix/interface/transmix quantities of Superior Kerosene Oil (SKO) occurring during pipeline sequential pumping with Motor Spirit (MS) or High Speed Diesel (HSD) amount to "manufacture" within the meaning of Section 2(f) of the Central Excise Act, 1944, attracting additional excise duty.

2. Whether excise duty on intermingled SKO can be levied at the higher rate applicable to MS/HSD (i.e., duty on surge/gain in MS/HSD) instead of the rate applicable to SKO, by applying a Board circular directing valuation at the highest of the two rates.

3. Whether a departmental order confirming differential duty demands and imposing equal penalties under Section 11AC read with Rule 25, after appropriating amounts already paid, is sustainable where appellants paid duty treating intermix SKO as industrial SKO.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Whether intermixing/transmixing during pipeline transfer constitutes "manufacture" (Section 2(f))

Legal framework: Section 2(f) of the Central Excise Act defines "manufacture", including processes incidental or ancillary to completion of a manufactured product and clause (iii) limited to goods specified in the Third Schedule. Levy of central excise is on manufacture/production of excisable goods as per Section 3 and First/Second Schedules.

Precedent treatment: The Tribunal's prior decisions (cited and followed) hold that post-removal intermixing does not necessarily amount to manufacture where the goods are not specified in the Third Schedule and where the show-cause notice did not allege manufacture.

Interpretation and reasoning: The Court notes no allegation in the SCN that intermixing post-removal constitutes manufacture; reliance by the Adjudicating Authority on clause (iii) of Section 2(f) is misplaced because clause (iii) applies only to goods in the Third Schedule, which is not the case here. Intermixing occurring during pipeline transfer and collected as interface in tanks arises from operational necessity and safety norms (ICQM) and is not a process creating a distinct commodity meeting tariff technical specifications of MS/HSD.

Ratio vs. Obiter: Ratio - Intermixing of SKO with MS/HSD under the facts does not amount to manufacture under Section 2(f); Adjudicating Authority erred in treating it as manufacture. Obiter - Observations on operational necessity and safety norms as contextual facts.

Conclusion: The activity of intermixing/transmixing during pipeline transfer does not amount to manufacture for excise levy purposes; therefore duty cannot be imposed on that ground.

Issue 2 - Whether duty on intermingled SKO can be assessed at the higher rate applicable to MS/HSD by applying a Board circular

Legal framework: Valuation and levy provisions under Sections 3 and 4 of the Central Excise Act require duty to be charged with reference to value at time of removal; Section 4 prescribes transaction value rules where goods are sold, and the statute provides classification/levy at rates in the First Schedule (Tariff Act, 1985). No statutory provision authorizes charging different rates on the same excisable goods.

Precedent treatment: The Tribunal's earlier decisions (and subsequent dismissal of departmental civil appeal by the apex court) rejected application of the Board circular that directs applying the price of HSD/MS to interface SKO; authorities held that a Board circular cannot override statutory provisions or create law.

Interpretation and reasoning: Each commodity (SKO, HSD, MS) has distinct tariff classification and technical specifications (BIS standards) in Chapter 27; intermix SKO does not satisfy technical specs of MS/HSD and thus cannot be classified as MS/HSD. Section 4 mandates duty on transaction value at removal; appellants cleared goods separately as SKO and MS/HSD and paid duty accordingly. The Board circular is administrative guidance and lacks statutory backing to alter valuation/classification; therefore it cannot be applied to levy higher duty on SKO interface quantities.

Ratio vs. Obiter: Ratio - Duty on intermix SKO cannot be assessed at rates applicable to MS/HSD by reliance on the Board circular; valuation must follow statutory Section 4 and tariff classification. Obiter - Comments on inability of circulars to create substantive law without legislative support.

Conclusion: Demanding duty on interface SKO at MS/HSD rates via Board circular is not legally sustainable; intermix SKO should be taxed according to its own classification/value at removal.

Issue 3 - Appropriation of duty already paid and imposition of penalties (Section 11AC/Rule 25) where appellants paid duty on intermix SKO as industrial SKO

Legal framework: Provisions permit appropriation of duty paid; penalties under Section 11AC and Rule 25 are imposed for contraventions in specified circumstances. SCN must specify grounds of demand and adjudication must remain within scope of SCN.

Precedent treatment: Coordinated Tribunal orders in similar matters set aside confirmed demands and penalties where appellants had paid appropriate duty for SKO as industrial SKO and where statutory provisions did not support differential demand; Supreme Court dismissed departmental appeal against such Tribunal order.

Interpretation and reasoning: Appellants had cleared and paid duty on MS/HSD and paid differential duty for SKO at industrial rates (not PDS concessional rate) for intermixed quantities; the adjudicating authority nonetheless confirmed additional demand and imposed penalty relying primarily on the Board circular. Given lack of statutory basis to treat intermix SKO as MS/HSD, the differential demand over and above duty already paid is unsustainable. Further, adjudication went beyond the scope of SCN by treating intermixing as manufacture where SCN did not charge manufacture. Penalty imposition based on unsustainable demand cannot stand.

Ratio vs. Obiter: Ratio - Appropriation of duty already paid towards liability was proper; differential demands and equal penalties imposed are not maintainable. Obiter - Remarks on insufficiency of administrative circulars to justify penal consequences.

Conclusion: Appropriation of the duty already paid is permissible; however, confirmation of additional excise demands and imposition of penalties are legally unsustainable and must be set aside.

Cross-References and Overarching Conclusion

Cross-reference: Issue 1 (no manufacture) and Issue 2 (classification/valuation) are interlinked - absence of manufacture and failure to meet technical specifications for MS/HSD together preclude treating intermix SKO as MS/HSD. Issue 3 follows - where statutory valuation/classification governs, administrative circulars cannot be used to increase duty or sustain penalties.

Final conclusion (ratio): The impugned adjudication confirming additional excise duty on intermix SKO at MS/HSD rates and imposing consequential penalties is not legally sustainable; demands and penalties are set aside while appropriation of duty already paid as industrial SKO is acceptable. The Court allows the appeal and sets aside the impugned order to the extent indicated.

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