Dismissed

The Commissioner, Customs (Preventive) v. M/S Nayara Energy Ltd.

Gujarat HC11 Oct 2019TAXAP/676/2019

Case brief

AI extract

What is this about?

The dispute concerned duty-free LSFO imports under Advance Authorisation and whether exported motor spirit had used qualifying inputs. The court accepted that sweet VGO met LSFO specifications and found no perversity in the Tribunal’s factual findings. It dismissed the revenue’s appeal for want of a substantial question of law.

What the court decided

AI extract

The Commissioner, Customs (Preventive) Vs M/S Nayara… — Customs and Excise | Gujarat HC (2019)

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C/TAXAP/676/2019 ORDER

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

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R/TAX APPEAL NO. 676 of 2019

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THE COMMISSIONER, CUSTOMS (PREVENTIVE)

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Versus M/S NAYARA ENERGY LTD.

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Appearance: MR PY DIVYESHVAR(2482) for the Appellant(s) No. 1 VISHAL AGRAWAL, DIMPLE GOHIL and AAYOG DOSHI for NANAVATI ASSOCIATES(1375) for the Opponent(s) No. 1

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CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MS. JUSTICE SANGEETA K. VISHEN

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Date : 11/10/2019 ORAL ORDER

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(PER : HONOURABLE MS.JUSTICE HARSHA DEVANI)

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By this appeal under section 130 of the Customs Act, 1962 (hereinafter referred to as the “Act”), the appellant has called in question, the order dated 4.6.2019 passed by the Customs, Excise and Service Tax Appellate Tribunal, West Zonal Bench, Ahmedabad (hereinafter referred to as “the Tribunal”) by proposing the following fifteen questions, stated to be substantial questions of law:-

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“(a) Whether provisions of para 4.1.15 of the FTP introduced by DGFT vide Notification No.31(RE2013)/2009-2014 dated 01.08.2013 is applicable to Advance Authorisation issued prior to 01.08.2013, in case where import and export under said Advance Authorisation were made after 01.08.2013?

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(b) Whether in the Advance Authorisation Scheme, it is

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required to use permissible input as specified in relevant SION, for manufacture of export product and the same must be physically incorporated in the export product?

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(c) Whether in the facts and circumstances of the case, the products namely Low Sulphur Fuel Oil (LSFO) and Vacuum Gas Oil (VGO) are same product or otherwise, since HSN, SION and Physical property of these products are classifying the product as separate one?

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(d) Whether in case, where in respect of product only 02 or 3 parameters out of total 9 parameters, as specified under IS 1593:1982, were tested, such the product can be construed as a product confirming to the standard specified under IS 1593:1982?

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(e) Whether Tribunal was justified in admitting addition/fresh evidences in the form of “technical note” at a belated stage especially when the same were not produced/brought before either the investigating agency or the Adjudicating Authority?

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(f) Whether the Tribunal was correct in rejecting all the statements of technical employees of the company which were recorded under Section 108 of the Customs Act, 1962?

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(g) Whether the Hon’ble Tribunal was correct in rejecting evidences in the form of technical opinion of Joint Director CRCL in the technical issues relating to classification?

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(h) Whether Tribunal was correct in deciding the question ‘whether import made against Advance Authorisation issued prior to 01.08.2013 subject to restrictions imposed by DGFT Notification No.31/(RE2013)/209-14 dated 01.08.2013 and more specifically para 4.1.15 thereof’ by applying the ratio of Judgment passed by the High Court of Haryana and Punjab in the case of Pushpanjali Floriculture Pvt. Ltd. 2016 (340) ELT 32 (P&H) to the instant issue when neither the impossibility of compliance nor retrospective divesting of rights available to License holder nor retrospective legislation nor promissory estoppel were issues in the instance case?

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(i) Whether Tribunal was correct in framing the question of ‘whether export products were required to be manufactured from permissible inputs’ in such manner as to confining it as flowing from para 4.1.15 only, while ignoring the same specification in other provisions of FTP 2009-14, the written conditions of the license as also the nature of AA which allows duty free import of only those inputs which are physically incorporated in export product?

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(j) Whether Tribunal was correct in holding that ‘inputs imported duty free could be utilised for the manufacture and export of the resultant products by importer for discharge of export obligation only or that ‘export goods should have been produced only by using permissible inputs’ is an impossible requirement of FTP and is

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completely illogical?

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(k) Whether in the facts and circumstances of the case, the CESTAT was justified in setting aside the OIO by solely relying upon the judgment of Hon’ble P&H High Court Order dated 01.07.2016, when the DGFT has challenged the same by filing an appeal in the Hon’ble Supreme Court of India in Civil Appeal No.284/2017 against said order of High Court and the same has been admitted by the Apex Court?

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(l) Whether in the facts and circumstances of the case, the CESTAT was justified in holding that the parameters framed under BIS 11489:1985 for the purpose of considering Fuel Oil as LSFO are not applicable in the instant case with regard to content of sulphur in LSFO?

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(m) Whether CESTAT was correct in holding that Joint Director CRCL had gone beyond his role of testing sample and reporting test results, by offering his own interpretation and views on what LSFO is; when Circular No.33/2001 dated 04.06.2001 read with BIS 1593:1982 clearly specifies the specification of Fuel Oil?

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(n) Whether the Tribunal was acting within the purview of appeal and was correct in ousting the jurisdiction of any investigating agency and making the provisions of Customs Act under section 28(4) [and even 28(1)] and Section 108 otiose in all such cases pertaining to violation of FTP?

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(o) Whether, in case where the export goods are rendered liable to confiscation under section 113(d) and 113(i) of the Customs Act, 1962, it is justified that no penalty is imposed under Section 114(iii) of the Customs Act, 1962?”

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The impugned order passed by the Tribunal was rendered in two appeals being Customs Appeal No.11391 of 2018 which was filed by the respondent M/s. Nayara Energy Limited and Customs Appeal No.11674 of 2018 which was filed by the appellant. Since a common appeal will not lie against the order of the Tribunal passed in two different appeals, this appeal is treated as an appeal preferred against the order passed by the Tribunal in Customs Appeal No.11391 of 2018. Out of the proposed questions, Question (o) arises out of revenue’s appeal before the Tribunal and hence, cannot be raised in the present appeal.

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The respondent is engaged in the manufacture and export of various petroleum products including Motor Spirit, LPG, SKO etc, falling under chapter headings 25 and 27 of the First Schedule to the Central Excise Tariff Act, 1985. The respondent exported Motor Spirit under shipping Bill dated 7.10.2013 and imported LSFO (Low Sulpur Fuel Oil) under Advance Authorisation. A show cause notice dated 8.12.2016 came to be issued to the respondent alleging that they had mis-declared that the exported product has been manufactured out of LSFO and has thereby violated the condition of Notification No. 31/(RE-2013)/2009-14 dated 1.8.2013 issued by Directorate General of Foreign Trade read with para 4.1.15 of Foreign Trade Policy 2009 - 14. It was

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alleged that the respondent had not used LSFO as an input in the export goods but has used VGO (Vacuum Gas Oil) generated during the refining of crude oil and had subsequently imported permissible input LSFO without payment of customs duty under Notification No.96/2009 – Cus dated 11.9.2009 against the Advance Authorisations and had thus contravened the provisions of rule 14 of Foreign Trade (Regulation) Rules, 1993. It was proposed to demand customs duty on goods imported by the respondent under Advance Authorisation under section 28(4) along with interest under section 28AA and penalty under section 112 (a)/114A and 114 (iii) of Customs Act. By an order-in-original dated 20.2.2018 passed by the Commissioner of Customs, Jamnagar, the exemption availed by the respondent towards importation of Low Sulphur Fuel Oil (LSFO) against Advance Authorization scheme came to be denied on the ground that the said import had been made in violation of para 4.1.15 of the Foreign Trade Policy. Further that since LSFO was not used in the manufacture of Motor Spirit which the respondent had exported while claiming discharge of export obligation, it was not entitled to clear such LSFO duty free. The show cause notice proposed to deny the benefit of customs exemption Notification No.96/2009-Cus dated 11.9.2009, to the consignment of LSFO imported vide Bill of Entry No.F-65 dated 11.10.2013.

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The respondent filed a reply denying the allegation of mis-declaration and stated that sweet VGO which was the main feed component of the Fluidized Catalytic Cracking Unit (FCCU), was an LSFO meeting all specifications of LSFO as prescribed in IS 1593:1982. The respondent also contested the

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show cause notice on the grounds of jurisdiction and limitation and sought cross-examination of witnesses. After granting opportunity of cross examination of witnesses to the respondent, the Commissioner of Customs by an order dated 20.2.2018, confirmed the demand for duty by invoking the larger period of limitation and also imposed penalties under section 28AA and section 114A of the Customs Act.

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Being aggrieved, the respondent carried the matter in appeal before the Tribunal. By the impugned order dated 4.6.2019, the Tribunal allowed the appeal filed by the respondent and set aside the order-in-original dated 20.2.2018.

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Mr. Parth Divyeshwar, learned senior standing counsel for the appellant, assailed the impugned order by submitting that the respondent has failed to prove that VGO produced within its refinery and used as FCCU feed stock was meeting with all the specifications of LSFO as per IS 1593:1982. It was submitted that the in-house test reports did not contain test findings for acidity, ash, sediments and water content which was also a requirement of IS 1593:1982, and hence, the contention of the respondent that sweet VGO was also LSFO had not been proved.

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6.1 It was further submitted that the respondent themselves had exported LSFO and VGO in the past declaring them as LSFO and VGO respectively which establishes that the two products were understood differently in trade. While exporting VGO in the past, the respondent had not classified the same under the classification entry for fuel oil. According to the

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learned senior standing counsel, the customs exemption notification has to be strictly construed and all policy provisions were impliedly conditions of the exemption notification issued under the Customs Act.

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6.2 It was submitted that since it is the case of the respondent that it is entitled to exemption from customs duty under Advance Authorisation read with Notification No.96/2009-Cus dated 11.9.2009, the burden lies upon the respondent to establish its claim that it is entitled to such exemption and that its claim falls within the ambit of the exemption notification. It was submitted that the Tribunal has erred in holding that the Commissioner had chosen to cast an absolute burden upon the respondent. It was submitted that it was the responsibility of the respondent to establish that its claim with sustainable evidences as the burden of proof rests on it. It was submitted that the respondent claims that it had used VGO for manufacturing of export product and the test reports were based on three to four parameters, out of nine parameters as specified under IS 1593:1982 and that VGO does qualify as LSFO as the same conforms to the standards of IS 1593:1982. It was submitted that based on other aspects, it is established that the products VGO and LSFO are different products classifiable under different sub-headings of Chapter 27 of the Customs Tariff Act and prominent employees of the respondent have admitted and the Joint Director of CRCL, Kandla has opined that product VGO and LSFO are different products, therefore, the adjudicating authority was justified in coming to the conclusion that VGO and LSFO are different products. It was submitted that during the course of inquiry it was found from the Tank Storage data for the year 2013, that

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initially, VGO was shown as the service details in respect of Tanks No.503A, 503B and 503D which was changed to LSFO (FCCU FEED) from 14.09.2013, 20.09.2013 and 14.09.2013 respectively and the closing stock of VGO was considered as opening stock of LSFO on the date of changing the name of the service tank. Thus, the respondent had changed the name of four storage tanks which demonstrated a willful intent to deceive and mislead the customs authority into believing that motor spirit had been produced out of LSFO when in fact it had been produced from VGO which was a product different from LSFO as per trade parlance.

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6.3 It was submitted that the Commissioner of Customs in the order-in-original has recorded findings based upon the evidence available on record and that the Tribunal without reference to such findings, was not justified in overruling the findings recorded by the Commissioner. It was, accordingly, urged that the appeal requires consideration on the questions as proposed or as may be deemed fit by this court.

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As can be seen from the impugned order, before the Tribunal it was the case of the respondent that exemption had been wrongly denied to it as there was no requirement in the advance licence or notification that the imported LSFO should be used as an input in export product. It was submitted that the respondent in its oil refinery is manufacturing petroleum products viz. Motor Spirit, LPG, SKO, etc. using crude oil and condensates as the starting raw material. The crude oils are first distilled in distillation columns known as CDU (Crude Distillation Column) or VDU (Vacuum Distillation Column) and thereafter cracked in Fluidized Catalytic Cracking Unit (FCCU)

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for yielding the finished products. In between the two basic processes of distillation and cracking, the intermediate product streams emerging from the distillation columns also undergo further processing including in particular, the process of hydrotreatment aimed at reducing the sulphur content which is an impurity. The intermediate products emerging from the distillation process include various kinds of Vacuum Gas Oils (VGO) which are hydro treated to turn them into sweet VGO, which is then blended with other intermediates to form the FCCU feed stock which is then cracked FCCU to yield various refinery finished products such as LPG, motor spirit, etc. In order to optimally utilize the spare FCCU capacity, the respondent imported LSFO which though an intermediate product is also marketed by many refineries world over as a finished product. The LSFO was imported against Advance Authorization dated 6.5.2013 which was issued in terms of Standard Input Output Norms (SION) A3263. The respondent first completed its export obligation against the subject Advance Authorization and another Advance Authorization dated 8.5.2013 by exporting a quantity of 55,034 metric tonnes of motor spirit. Post export of motor spirit, it imported the disputed consignment of LSFO vide Bill of Entry No. F-65 dated 11.10.2013 which was cleared by the Customs without payment of duty under the Advance Authorization dated 6.5.2013. The LSFO so imported was used within the refinery as a component of the FCCU feed stock from which motor spirit, amongst other finished products was produced.

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7.1 It was submitted that the undisputed facts of the case are that the goods exported (Motor Spirit) and that imported (LSFO) by it are conforming to the description and

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classification declared in the shipping bill and bill of entry respectively; the DGFT accepted the exports made by the respondent as being in discharge of the export obligation under the Advance Authorisation and issued the necessary Export Obligation Discharge Certificate (EODC)/redemption letter on 11.6.2015; LSFO imported by the respondent as its replenishment entitlement was actually used by it in its refinery as part of the feed stock requires for manufacturing motor spirit, amongst other finished products. It was contended that the respondent had satisfied all the conditions of the relevant Customs Exemption notification No.96/2009Cus dated 11.9.2009; however the duty had been demanded by denying the benefit of the said exemption notification solely on the basis that one of the requirements in the Foreign Trade Policy, which came to be introduced on 1.8.2013 by insertion of para 4.1.15 in the policy had been infringed. It was contended that the conditions imposed vide para 4.1.15 of the Foreign Trade Policy were inapplicable in the present case as the Advance Authorisation had been issued to the respondent prior to 1.8.2013 when the said para 4.1.15 was inserted in the Foreign Trade Policy.

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7.2 It was contended that the demand in the order-in-original was confirmed on two assumptions, the first being that para 4.1.15 of the Foreign Trade Policy introduced with effect from 1.8.2013 was applicable even to an Advance Authorization issued prior to that date; and the second being that the said para 4.1.15 necessarily required the export products to be manufactured only by using permissible duty free inputs. It was submitted that in case of the first assumption neither the Advance Authorization nor the FTP nor the customs notification

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either existing at the relevant time when the import was made, or even on date, require export goods to be manufactured only by using duty free inputs. Reliance was placed upon DGFT Circular 72(RE-08)/2004-09 that clarifies that the objective of SION was to allow duty free imports of inputs actually used or capable of being used in the export products.

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7.3 It was submitted on behalf of the respondent that the first assumption that LSFO ought to have been actually used in manufacture of export product was totally incorrect. In respect of the second assumption as to whether para 4.1.15 was at all applicable in the present case, it was submitted that as per the order-in-original, the requirement of manufacturing export goods only from permissible inputs was introduced in the Foreign Trade Policy only vide DGFT Notification No. 31/(RE2013)/2009-14 dated 1.8.2013, by which para 4.1.15 was added. The show cause notice as well as the order-in-original rely heavily on para 4 of the said DGFT Notification dated 1.8.2013, which purports to explain the effect of the amendment by stating that the inputs actually used in the manufacture of export products should only be imported under the Authorization. It was submitted that it is clear that the amendment made in the Foreign Trade Policy by the said notification dated 1.8.2013 has been applied retrospectively by the lower authorities inasmuch as the Advance Authorization in question had been issued on 6.5.2013 which was prior to the said DGFT notification and that such retrospective application of a newly inserted provision in Foreign Trade Policy is impermissible in law. Reliance was placed upon decision of the Punjab and High Court in the case of Pushpanjali Floriculture Pvt. Ltd ., 2016 (340) ELT 32 (P&H), wherein the

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above principle was applied in the context of the very same DGFT notification to hold that imports made after 1.8.2013 by using DFIA prior to 1.8.2013 could not be subjected to the additional restriction imposed by the said DGFT notification. The High Court also struck down para 4 of the DGFT notification dated 1.8.2013 by holding that it was manifestly absurd and unreasonable. It was contended that even if para 4.1.15 of FTP inserted with effect from 1.8.2013, is assumed to be applicable to imports made against an Advance Authorization issued before 1.8.2013 and even if para 4 of the notification dated 1.8.2013 is assumed to be correctly reflecting the true effect of para 4.1.15, even in that case the demand had been wrongly confirmed as the respondent had in fact satisfied the requirements of para 4 of the said DGFT notification by actually using LSFO in the manufacture of motor spirit which was exported on 7.10.2013.

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7.4 The respondent had further contended that VGO, which is the main component of FCCU feed stock, is an LSFO as it fully meets the specifications of LSFO as per IS: 1593:1982. It was pointed out that according to the Supplementary Chapter Note (g), Fuel Oils means any hydrocarbon oil conforming to IS specifications 1593:1982. Reference was made to a letter dated 9.8.2016 and a statement dated 3.8.2016 of Mr Chakrapany Manoharan, Director (Refinery) of the respondent company, to emphasize that the attention of the investigating agency was specifically drawn during the course of the investigations to the fact that the FCCU feed stock from which exported motor spirit was produced was conforming to the specifications of LSFO as per IS 1593:1982. It was submitted that VGO is a specific variety of LSFO having low sulphur

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content (much less than 1%), and met with the specifications prescribed for fuel oils in IS 1593:1982. The declaration on the shipping bill that the motor spirit had been produced out of LSFO was therefore, perfectly correct.

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7.5 It was submitted that LSFO is a generic name used to refer to various kinds of fuel oils meeting BIS specifications, which are traded with a specific stipulation between the contracting parties as to the maximum sulphur content and that some varieties of VGOs are described as Low Sulphur Waxy Residue (LSWR) by some refineries in a sense synonymous with LSFO. As per IS 1593:1982, the maximum sulphur content in fuel oils, depending upon its grade, cannot exceed the range of 3.5 to 4.5%. The IS standards records that a lower limit of sulphur can be specified by mutual agreement between the purchaser and the supplier if the purchaser wishes to buy LSFO for some specialized uses. It is thus clear that though a maximum sulphur content is prescribed in the ISI, the lower limit for sulphur content is not specified but left to the contracting parties to decide. Sweet VGO, which is produced in the refinery and from which exported motor spirit was produced according to the revenue, had sulphur content of much less than 1% and was, therefore, an LSFO meeting with all the specifications laid down in IS 1593:1982 and that some refineries market low sulphur fuel oil also by the description low sulphur waxy residue (LSWR). It was stated that SION A3263, while referring to import items LSWR/LSFO, in fact refers to the same product described differently by different refineries.

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7.6 It was also submitted on behalf of the respondent that

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within the refinery, various intermediate streams emerging from different processing units are given very specific names such as LVGO, HVGO, HHVGO, etc. so as to enable identification of their sources and their internal separate storage, accountal, etc. The fact that these intermediate streams are known by such specific names as their refinery parlance does not change the fact that they are all otherwise covered by the generic description LSFO. It was submitted that since a chapter note exists in the customs tariff giving a specific meaning to fuel oils as those conforming to IS 1593:1982, the lower authority has erred in overlooking the said statutory definition by giving a different meaning to LSFO by referring to the internal terminology and nomenclatures given to various types of LSFO streams emerging within the refinery. Explaining the use of the specific terminology VGO (as against LSFO) while exporting some consignments of VGO in the past, it was submitted that it is natural and usual for a seller to use the specific description of a product when the product is a superior variety of the generic product as that enables the seller to command a premium over the average price of the generic product. It was submitted that LSFO being a generic description, products which are sold under the trade name LSFO are usually at the lower end/spectrum of the range of LSFO's. The superior varieties of LSFO such as VGO are marketed and sold, not with reference to their generic name, but by describing them by their specific name VGO. It was submitted that various types of VGO, including sweet VGO, which formed part of FCCU feed stock were regularly tested in the respondent’s in-house laboratory which is an ISO approved facility for checking the key parameters specified in IS 1593:1982. The in-house test reports which were collected in

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the course of investigations and which are acceptable evidence as per Board Circular No.25/2005-Cus dated 6.5.2005, prove beyond doubt that the key parameters of IS 1593:1982 were satisfied. It was submitted that when questioned by the investigating agency about the remaining parameters of ash, acidity, sediment and water content for which the in-house test reports did not contain any readings, Mr. Sreedhar Rudraraju, Chief Planning Officer of the respondent company, had clarified in his statement dated 8.8.2016 that these parameters also met the inferred or derived stream property calculations.

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7.7 It was contended on behalf of the respondent that the approach of the Commissioner that the export product should be manufactured only by using permissible inputs is based upon an improper understanding of the nature of standard input output norms (SION) notified by the DGFT. It was submitted that SION’s only prescribe the quantity ratio in which duty free entitlements are to be allowed to an exporter, and do not reflect the actual ratio in which inputs are used for manufacturing export products. It was pointed out that the ratio of 1 MT : 1.265 MT given in the relevant SION A3263 for motor spirit : LSWR/LSFO is not the material balance equation representing the actual ratio of consumption and yield and in the manufacturing process, but it is only the ratio in which the duty free entitlement has been allowed. It was pointed out that it was physically impossible to produce 1 MT of motor spirit by using only 1.265 MT of LSWR/LSFO and that in actual practice about 5MT of LSFO is required to produce I MT of motor spirit, as several co-products such as SKO, LPG and HSD also emerge together with motor spirit.

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7.8 It was further submitted that the revenue had ignored the fact that the licensing authorities had accepted the export made by the respondent towards the export obligation and had issued an export obligation discharge certificate (EODC)/redemption letter on 11.6.2015 which showed that the DGFT was fully satisfied with the export made by the respondent and also with the license conditions being met and that despite specific reference from the investigation agency, the DGFT had neither withdrawn the EODC/Redemption letter nor cancelled the license, nor initiated any proceedings alleging violation of the FTP provisions.

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The Tribunal, after considering the submissions advanced by the learned counsel for the respective parties has taken note of the Table in IS 1593:1982, which summarizes the specifications of fuel oils in general with a separate reference to LSFO. For ready reference, the table is reproduced hereunder:-

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IS : 1593 - 1982

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		TABLE: REQ	UIREMENTS FO (Clause 3.3)	R FUEL OILS
SL No.	CHARACTERISTIC		REQUIRE	MENT FOR		METHOD OF TEST(REF TO (P:) OF IS:1448*
		Grade LV	Grade MVI	Grade MV2	Grade HV
[1]	[2]	[3]	[4]	[5]	[6]	[7]
i)	Acidity, inorganic	Nil	Nil	Nil	Nil	P:2
ii)	Ash, percent by mass, Max	0.1	0.1	0.1	0.1	P:4 (Method A)
Iii)	Gross, calorific value		Not Limited, bu (See	t to be reported Note 1)		P:6 (for reference) and P:7 (for routine)
iv)	Relative density at 15/15°C		Not Limited, bu (See	t to be reported Note 2)		P:32
v)	Flash point, [Pensky martens (closed)], Min	66°C	66°C	66°C	66°C	P:21
vi)	Kinematic viscosity in	80	125	180	370	P:25

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	centistokes at 50°C, Max
vii)	Sediment, percent by mass, Max	0.25	0.25	0.25	0.25	P:30
viii)	Sulphur, total, percent by mass, Max (See Note 3)	3.5	4	4	4.5	P:33 (for reference) and P:35 (for routine)
ix)	Water content, percent by volume, Max	1	1	1	1	P:40

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NOTE 1 – Normally the gross calorific value is of the order is 10,000 cal/g. NOTE 2 – Fuel oil for marine uses in diesel engines shall not exceed a limit of 0.99. NOTE 3 – Recognizing the necessity for low-sulphur fuel oils in some specialised user, a lower unit may be specified by mutual agreement between the purchaser and the supplier. *Methods of test for petroleum and its products

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Out of the nine parameters prescribed under the said table, the Tribunal noted that two are merely to be reported and no limitation has been prescribed. Effectively thus, there are seven parameters which need to be satisfied. These parameters are acidity, ash, flash point, kinematic viscosity, sediment, sulphur and water content. The Tribunal noted that Note 3 thereunder deals with Low-Sulphur Fuel Oils and observed that the same can be regarded as imposing an additional requirement of sulphur content being low. As to how low the sulphur content should be has not been specified in the BIS Standards and has been left to the contracting parties to decide.

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The Tribunal further found that the in-house test reports of the respondent, which were collected during the course of investigation show that the VGO's emerging within the refinery as intermediate streams were routinely tested as part of the respondent’s regular refinery operations. The laboratory of the respondent is ISO 9000 certified and as per Board circular 25/2005 dated 6.5.2005, test results given by such a laboratory are acceptable to the Customs. The revenue has

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also not doubted the credibility and accuracy of the in-house test reports. However, according to the revenue, since these test reports did not contain test values for four different parameters viz. ash, acidity, sediment and water content, the respondent had failed to establish that VGO was conforming to all the prescribed specifications for LSFO. According to the respondent, the in-house testing is done for certain key parameters which includes three of the seven mentioned in the IS 1593:1982. Compliance with the remaining four parameters is inferred through property stream calculations. The respondent had submitted a technical note, explaining how compliance with the remaining four parameters of ash, acidity, sediment and water content can be inferred or derived from property stream calculation, which reads thus:

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The inferred/derived results in respect of other specifications prescribed in BIS 1593-1982

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The following table indicates the requirement/specification of Fuel Oil (IS 1593 ). Last two columns of the table indicates results of tests carried out for samples from tanks T-503A/T-503B/T-503D and for combined feed (fresh feed) being processed in FCC unit. It is evident from test results tabulated in last two columns that both these streams are passing specifications of IS 1593.

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SL No.	Characteristics	Method No.	Requirement	Tank sample	FCC Feed (Fresh Feed) Sample
			LV MV1 MV2 HV
1	Acidity, inorganic mg KOH/g	IS 1448 [P.2]	Nil	Nil	Nil	There is no inorganic acid present in the crude oil. Further, there is no addition, use or generation of inorganic acids like HCl, H2SO4, HNO3etc during the refining process. Given above, there is no possibility of inorganic acid being present in the stream. The FCC feed boils in the range of 300^oC – 570^oC, whereas the boiling point of water is 100^oC. Thus, the water would have evaporated earlier in the distillation process. Inorganic acids are water soluble and not

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oil soluble. As a result, there is no possibility of presence of water soluble inorganic acids in the Feed.

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2	Ash, % by mass	IS 1448 [P-4]	0.1 Max	0.01	0.01	Ash is composed of materials that cannot be burnt out during the distillation process. These solid materials (such as dust and other impurities) are likely to be found in the residue crucible of the distillation columns. As the FCC Feed is composed wholly of intermediate streams drawn as side cuts (excluding the residue) from distillation columns, this residue will not be present in the Feed. The principal elements contributing to high ash contents of petroleum stocks are metallic salts and organometallic compounds. The FCC feed contains metals like Nickel, Sodium etc. in the 5-50 ppmw range (0.005%). Hence, ash content is never likely to be more than 0.1% by mass.
3	Calorific value, gross cal/g	IS 1448 [P-7]	To be reported (Note 1 – should be around 10,000 cal/g)	10400- 10800	10500- 10800	The numbers given are from test reports obtained subsequent to the issue of the SCN.
4	Relative density at 15/15^oC	IS 1448 [P.16] or IS 1448 [P.32]	To be reported (Marine Engines 0.99 Max)	874-908	875-928	Tested
						The flash point is the temperature at which sufficient vapors in presence of air will form combustible mixture and will flash/momentarily ignite, when given a spark
5	Flash point, Pensky-Martens closed,^oC	IS 1448 [P.21]	66 Min	142-200	162-197	LSFO FCC feed is heavier than diesel cut has IBP of around 300 degree C. It is expected to generate sufficient vapors which forms combustible mixture at around temperature of 150 degree C or more. Hence the specification of minimum 66^oC will necessarily be met
6	Kinematic viscosity at 50oC, cSt Above Up to	IS 1448 [P.25]	80 125 180 80 125 180 370	22-67	22-32	Tested
						Sediments are likely to be found in the residue crucible of the distillation columns. As the FCC
7	Sediment, % by mass	IS 1448 [P.30]	0.25 Max	Nil	Nil	feed is composed wholly of intermediate streams drawn as side cuts (excluding the residue) from distillation columns, this residue will not be present in the Feed.

¶110

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8	Total sulphur, % by mass	IS 1448 [P.33]	3.5 Max 4.0 Max	4.0 Max	4.5 Max	0.04-1.5	0.02-0.7	Tested
								The FCC feed boils in the range of 300^oC – 570^oC, whereas the boiling point of water is 100^oC. Thus, the water would have evaporated earlier in the distillation process.
9	Water content, % by volume	IS 1448 [P.40]	1.0 Max			0.05	0.05	Also the products are drawn as side cuts of distillation columns at high temperatures (approx. 230-380^oC). Water would have evaporated earlier at around the 100^oC mark. Hence water content is not expected in LSFO (FCC Feed).

¶113

On a perusal of the above table, it emerges that insofar as the parameter of acidity is concerned, there is no inorganic acid present in the crude oil. There is no addition, use or generation of inorganic acids like HCl, H2SO4, HNO3, etc., during the refining process. Thus, there is no possibility of inorganic acid being present in the stream. Moreover, the FCC feed boils in the range of 300^o C – 570^o C, whereas the boiling point of water is 100^o C, thus, water would have evaporated earlier in the distillation process. Inorganic acids are water soluble and not oil soluble; hence, there is no possibility of presence of water soluble inorganic acids in the Feed.

¶114

Insofar as ash percentage is concerned, it was explained that ash is composed of materials that cannot be burnt out during the distillation process. These solid materials (such as dust and other impurities) are likely to be found in the residue crucible of the distillation columns. As the FCC Feed is composed wholly of intermediate streams drawn as side cuts (excluding the residue) from distillation columns, this residue will not be present in the Feed. The principal elements contributing to high ash contents of petroleum stocks are

¶115

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metallic salts and organometallic compounds. The FCC feed contains metals like Nickel, Sodium etc. in the 5-50 ppmw range (0.005%). Hence, ash content is never likely to be more than 0.1% by mass.

¶118

Insofar as the parameter of flash point is concerned, it was submitted that the flash point is the temperature at which sufficient vapours in presence of air will form combustible mixture and will flash/momentarily ignite, which gives a spark. LSFO FCC feed is heavier than diesel cut has IBP of around 300^o C. It is expected to generate sufficient vapours which form combustible mixture at around temperature of 150^o C or more. Hence, the specification of minimum 66^o C will necessarily be met.

¶119

As regards the parameter of sediment percentage by mass, it was submitted that sediments are likely to be found in the residue crucible of the distillation columns. As the FCC feed is composed wholly of intermediate streams drawn as side cuts (excluding the residue) from distillation columns, the residue will not be present in the Feed.

¶120

Insofar as water content is concerned, it was submitted that the FCC feed boils in the range of 300^o C – 570^o C, whereas the boiling point of water is 100^o C. Thus, the water would have evaporated earlier in the distillation process. Also the products are drawn as side cuts of distillation columns at high temperatures (approximately 230-380^o C). Water would have evaporated earlier at around 100^o C mark. Hence, water content is not expected in LSFO (FCC Feed).

¶121

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¶123

The respondent had, thus, duly explained how the VGO met with all the parameters laid down in IS 1593:1982 as well as the low sulphur content required for LSFO. On behalf of the revenue, nothing was pointed out as to why the explanation submitted by the respondent should not be accepted. Even in the cross-examination of Mr. Chakrapany Manoharan, Director (Refinery) certain facts were brought out as under:-

¶124

Q1. Your statement referred to LSFO (FCC Feed) and VGO. Can you explain the difference between the two?

¶125

A1. LSFO is a generic term wide enough to cover VGO. VGO meets the specification of LSFO. VGO is the higher end in the LSFO family.

¶126

Q2. If VGO is only a variety of LSFO, why is it so described separately in refinery records, process charts etc? Can you please explain?

¶127

A2. Within the refinery, we need to give specific names to differentiate different intermediate streams which arise within the refinery for e.g. from the CDU itself, we have HVGO, LVGO; Sweet VGO from VGOHT unit; cracked VGO from cracker Unit. These are all different members of VGO family and the VGO itself is a member of the larger family of LSFO.

¶128

Q3. What if the penultimate intermediate product from which Motor Spirit is manufactured?

¶129

A3. One of the most critical components of Motor Spirit comes from the Fluid Catalytic Cracking Unit (FCCU) whose raw material is called FCC feed.

¶130

Q4. What is the FCC feed comprising of?

¶131

A4. The FCC feed comprise of various kinds of VGOs some of which are described above. These streams come from different process units within the refinery.

¶132

Q7. You have in your statement dated 03.08.2016, referred to the Sulphur content of VGO used as a feed but have not given the precise percentage of such Sulphur content. Can you

¶133

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clarify now?

¶136

A7. I do not remember exact percentage but it generally remains low so that the Motor Spirit produced from it is meeting the Sulphur requirement of Motor Spirit.

¶137

Q8. Sir, Is it generally less than 1% or can it exceed 1%

¶138

A8. It is much lower than 1%.

¶139

Q9. Is it therefore correct to say that MS produced from FCCU was produced from FEED which had less than 1% Sulphur content i.e. LSFO ?

¶140

A9. Yes.

¶141

Q11. I am showing you your statement where Mr Gajjar‟s statement has been shown to you, with which you have agreed. Mr Gajjar has stated that according to the reports of production, LSFO is not shown as one of the raw materials. Can you explain your previous answer in the context of this part of the statement?.

¶142

A11. The specific names of streams are used in the refinery reports rather than the generic name LSFO. This explains the position.

¶143

It may also be pertinent to refer to the following extract of the cross-examination of Shri Shyama Sadan Maji, Senior Vice President and Head of Operations of the respondent:-

¶144

Q4. Is it correct to infer from the list that LSFO was not used for manufacturing Motor Spirit?

¶145

A4.No. I did mentioned that all these feed components meet the specification of LSFO. These are only internal names given for operational convenience to identify the units from where these streams are coming.

¶146

Q9. In the stock reports shown to you at the time of recording statement the word LSFO also appears as one the Feed‟ ‟ element. This is on addition to various types of VGO that you have referred to above. Does this indicate various types of VGO are not LSFO?

¶147

A9. Answer is No. Name of the Feed streams appearing in the list indicates their source from where they are coming. LSFO (FCC feed) is coming from a tank whose service is LSFO (FCC Feed) and hence it is appearing in the list separately.

¶148

Q10. Do these different types of VGO meets the

¶149

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specifications of LSFO? A10. Yes, They meet the specification of LSFO.

¶152

The adjudicating authority, in the order-in-original, has mainly proceeded on the basis that out of seven parameters only three were tested and hence, VGO could not be considered as LSFO, ignoring the explanation put forth by the respondent. The adjudicating authority has also placed reliance upon the submission of the respondent that LSFO and VGO have distinct use, marketability and description as well the fact that the respondent had classified the LSFO under CTH 2710 1950 which covers the description of “Fuel Oil” whereas VGO was classified by it under CTH 2910 19 90 which is covered under the description “other”. Relying upon the aforesaid description given by the respondent as well as the statements of persons holding responsible positions in the respondent company recorded under section 108 of the Customs Act, 1962, the adjudicating authority has held that the Feed stock used in the manufacture of motor spirit under the said shipping bill was VGO and not LSFO. The adjudicating authority has relied upon the submission of the respondent that LSFO and VGO have distinct use, marketability and description and has held that it is settled law that the said product would be regarded separate and distinct manufacturing product from each other for the purpose of customs law. It, accordingly, has turned down the submission of the respondent that VGO and LSFO are the same and has held that it would establish that the export goods, that is, motor spirit was actually manufactured out of VGO only and not LSFO as declared.

¶153

In the opinion of this court, the adjudicating authority has

¶154

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failed to consider the relevant material namely, the explanation submitted by the respondent explaining that all the seven parameters required for LSFO are duly satisfied in the case of VGO. As noted earlier, out of seven parameters, three parameters were duly tested and found to be conforming to the specifications of IS 1593:1982. Insofar as the other four parameters are concerned, the respondent had duly explained that insofar as the water content is concerned, since the FCC feed boils in the range of 300^o C – 570^o C, whereas the boiling point of water is 100^o C the water would have evaporated earlier in the distillation process and hence, water content was not expected in LSFO. Insofar as ash and sediments are concerned, it was explained that ash and sediments were likely to be found in the residue crucible of the distillation columns, and that as the FCC feed is composed wholly of intermediate streams drawn as side cuts (excluding the residue) from distillation columns, the residue will not be present in the Feed. As regards flash point, it was pointed out that LSFO FCC feed is heavier than diesel cut has IBP of around 300^o C. It is expected to generate sufficient vapours which form combustible mixture at around temperature of 150^o C or more. Hence, the specification of minimum 66^o C will necessarily be met. As regards inorganic acid, it was pointed out that there was no possibility of inorganic acid being present in the stream as inorganic acids are water soluble and since water evaporates at 100^o C, there is no possibility of presence of water soluble inorganic acids in the Feed. It was, accordingly, explained by the respondent that insofar as the other four parameters are concerned, they are not required to be tested as they can be inferred from the very process which was followed by the respondent. However, the adjudicating authority has failed to

¶157

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take such explanation into consideration.

¶160

Having regard to the fact that Sweet VGO used in the manufacture of motor spirit meets with the specification of LSFO as prescribed by BIS: 1593-1982, the question of breach of DGFT notification No.31(RE-2013)/2009-14 dated 01.08.2013 whereby Para 4.1.15 came to be inserted in the Foreign Trade Policy providing that the inputs actually used in manufacture of the export product should only be imported under the Authorisation and similarly inputs actually imported must be used in the export product, does not arise.

¶161

In the light of the above discussion, this court finds no infirmity in the approach adopted by the Tribunal in accepting the explanation put forth by the respondent, which has a duly scientific basis. From the facts noted hereinabove, it is evident that the conclusions arrived at by the Tribunal are based upon findings of fact recorded after appreciating the material on record. In the light of the findings noted hereinabove, it is not possible to state that the findings of fact recorded by the Tribunal are in any manner perverse to the material on record. The learned counsel for the appellant is not in a position to point out that the Tribunal has placed reliance upon any irrelevant material or that any relevant material has been ignored so as to dislodge the findings of fact recorded by the Tribunal after appreciating the material on record. In the absence of any perversity being pointed out in the findings of fact recorded by the Tribunal, no question of law, much less, a substantial question of law can be stated to arise out of the impugned order, warranting interference.

¶162

In the absence of any substantial question of law arising

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out of the impugned order passed by the Tribunal, the appeal fails and is, accordingly, dismissed.

¶166

(HARSHA DEVANI, J)

¶167

(SANGEETA K. VISHEN, J)

¶168

Z.G. SHAIKH

¶169

Page 28 of 28

The Commissioner, Customs (Preventive) v. M/S Nayara Energy Ltd.

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The Commissioner, Customs (Preventive) v. M/S Nayara Energy Ltd.

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