1. The Appellants manufacture Oxo alcohol falling under Chapter Heading 29.02 of the Central Excise Tariff Act, 1985. In the process of manufacture of the alcohol by-product arises which is called Insan-LE (light ends). The main raw materials for obtain-ing Oxo alcohol are Olefins. The Central Excise authorities classified Insan-LE as goods not elsewhere specified in the Tariff under Item 68 of the old Central Excise Tariff. The Officers of the Preventive Branch of the Commissionerate at Baroda visited the Appellant's factory on 5-9-1986 and carried out enquiry regarding Insan-LE and drew samples of the product. They also detained a quantity of 28,20,500 kgs. of Insan-LE on 9-9-1986.
2. The Superintendent of Central Excise, Baroda issued a show cause notice on 3-3-1987 asking the Appellants to show cause why duty amounting to Rs. 76,34,398.94 should not be recovered under Rule 9(2) of the Central Excise Rules read with Section 11A of the Central Excise Act in respect of Insan-LE manufactured and removed by the Appellant for the period April, 1983 to August, 1986 on the ground that Insan-LE was classifiable as Motor Spirit under sub-heading 2710.19 and Modvat credit on inputs was wrongly taken. The Appellants were also asked to show why a sum of Rs. 1,47,782/-should not be recovered on 45,898 kgs.
of Insan-LE allegedly manufactured illicitly and removed during the financial year 1984-85. The Appellants were also asked to show cause why duty amounting to Rs. 10,28,651.40 should not be recovered in respect of Insan-LE another by-product weighing 196.142 M.T. which allegedly illicitly manufactured and removed during the period 1982-83 to 1986-87 and it was further alleged that there was variation in quantity mentioned in statutory register RG1 and that shown in the production reports of the Appellants and hence it was alleged that there was clandestine removal. Demand was also made for Rs. 2,39,864.58 in respect of Insan-LE under Heading 2710.19 weighing 50,748 kgs.
similarly on the charge of illicitly manufacture and clearance. There was a further demand of duty on Insan-LE, weighing 22,30,500 kgs.
seized from the Appellants factory on 9-9-1986 and subsequently provisionally released, as to why it should not be confiscated under Rule 173Q. Similarly there was a proposal to confiscate Insan-HE weighing 3,196 kgs. valued at Rs. 13,977/-.
3. The grounds given in the show cause notice were that as per intelligence collected, the Appellants mis-declared products Insan-LE a mixture of Hydro Carbon oil which is falling under Chapter 29. On the results of the samples tested on the products it was alleged that the Insan-LE was not a chemically defined compound and hence not covered by Chapter 29 of Central Excise Tariff Act, 1985 but covered by sub-heading 2710.19 which covers Motor Spirit. Reliance was placed on the literature on Insan-LE statements recorded or N.K. Valecha, Production Engineer of the Appellants and Shri P.M. Patel, Senior Accountant of the Appellants. Test results of the samples given by Deputy Chief Chemist on Insan-LE was also relied upon as well as the results by other agencies like IPCL and IOC. Subsequently the show cause notice was issued on 11-5-1988 by the Collector himself in the place of one issued by the Superintendent earlier on 3-3-1987.
4. On considering their detailed reply to the show cause notice denying all the charges, the Commissioner passed the order dated 31-1-1991 holding that the product Insan-LE is nothing but Motor Spirit and is classifiable under sub-heading 2710.19 and confirming the demand of Rs. 75,47,671/- in respect of Insan-LE under Chapter 27 of the Central Excise Tariff Act, 1985 and Item 6 of old CET for the period 1983-84 to 1986-87. He also ordered confiscation of the seized Insan-HE and of Insan-LE levying redemption fine of Rs. 10,00,000/-. He also ordered recovery of duty of Rs. 71,51,723/- under Rule 9(2) of the Central Excise Rules read with Section 11A of Central Excise Act in respect of the seized goods. Also ordered recovery of duty on the quantity of goods found short.
5. Being aggrieved by the order of the Commissioner the Appellant filed an appeal before the Tribunal and the Tribunal passed final order on 13-7-1994 holding that the material before the Tribunal was not sufficient to decide the classification of the product and the matter was remanded to the Commissioner to determine the classification of the product under Chapter 27. As a result of the order of the Tribunal the Appellants made detailed explanation regarding classification of Insan-LE and also given their explanation for the shortages found. On classification they contended that Insan-LE is classifiable as Aviation Turbine Fuel (ATF) under sub-heading 2710.21 [of] CETA. They resisted the classification of the product as Motor Spirit under sub-heading 2710.19 saying that the product is not considerable for use as fuel in spark ignition engine. Only if it is found so suitable the question of classifying it as Motor Spirit under 2710.19 will arise. The Commissioner in the impugned order held that Insan-LE fulfills the criterion of suitability for use as fuel in spark ignition engine and hence correctly classifiable under 2710.19. On the shortages also he confirmed the demand as was done in the earlier order of the Commissioner and the Commissioner also ordered confiscation of the land and building, plant and machinery under Rule 173Q levying redemption fine of Rs. 1,00,000/- and penalty of Rs. 10,00,000/- was imposed on the Appellants.
6. The learned Senior Counsel, Shri Hidayatullah for the Appellants along with learned Counsel, Shri Arun Mehta submitted that the product Insan-LE fully satisfies the criterion under Heading 2710.21 as an Aviation Turbine Fuel with reference to the smoke point and final boiling point prescribed therein for the product as revealed from the test report of the product. The learned Senior Counsel urged that in that heading there is no end use criterion regarding suitability for use as in the case of Tariff Heading 27.10 relating to Motor Spirit.
The learned Senior Counsel pointed out that even under the old CET the Insan-LE had been classified by the department under Item 68 [of] CET and not under Item 6 [of] CET which covers Motor Spirit. The learned Senior Counsel relied upon the Tribunal decision in the case of Cellulose Products of India v. Collector - 1996 (82) E.L.T. 147 to say that in respect of Motor Spirit with the suitability criterion prescribed in the Tariff, the department has to show that the product is actually, practically and commercially fit for such use. The learned Senior Counsel referred to the test report of the department's laboratories wherein the Chemical Examiner has reported that the Laboratory does not have the facility to test suitability of use as fuel in internal combustion engine. The learned Senior Counsel pointed out that the department is relying upon the test results given by Shri J.R. Nanda, Chief Research Manager of the Indian Oil Corporation, Faridabad wherein it has been certified that Insan-LE has Result Octane No. 82.2 which is close to the 83 RON gasoline marketed earlier and that it can be used as fuel with suitable blending to raise Octane Number. The learned Senior Counsel contended that even this certificate does not show that it is actually being used as fuel. Shri Nanda was also not offered for cross-examination by the Appellants. In this context the learned Senior Counsel referred to their correspondence with the Indian Oil Corporation whereby letter dated 22-4-1994 the IOC had said regarding the use of certain return streams from the Appellants works for blending into finished petroleum products and wherein the IOC has stated that after studying the characteristics of the return streams Insan-LE it was found that the same are not suitable for blending into any of their finished product. The learned Senior Counsel contended that this itself will show that the Insan-LE is not suitable for use as fuel in spark ignition engines. The learned Senior Counsel also pointed out that the department has not carried out any test regarding corrosion factor. This was an admitted position emerging from the cross-examination of the Chemical Examiner.
7. On the other hand that Appellants have led evidence by way of affidavit of Dr. IB. Gulati, Retired Director of Indian Institute of Petroleum, where after detailed examination of the product Insan-LE and also subjecting it to the corrosion test, Shri Gulati has opined that it is not found to be accepted and used as Motor Gasoline. It is highly corrosive in nature and cannot be mixed in any proportion to meet the test for corrosion for Motor Gasoline. The learned Senior Counsel also referred to and relied upon the Board's clarification in respect of the classification of Heptene and Nonene under the Central Excise Tariff in F. No. 528/157/93-10 TU (15-9-1994) saying that this product can be classified under Aviation Turbine Fuel (ATF) for Central Excise Tariff purposes because the heading for ATF does not prescribe end use but merely defines the item with reference to technical specifications.
8. The learned Senior Counsel also contended that the demand is batted by limitation. The period is from April, 1983 to September, 1986 and the show cause notice has been issued much beyond 6 months time limit under Section 11A on 3-3-1987 and on 11-5-1987 by the Collector. There is no suppression of facts by the Appellants because they have given the complete particulars about Insan-LE as being a by-product and the flow chart regarding process of manufacture as well as detailed description has been submitted to the department. They have further given particulars regarding end use. All their classification list have been approved and the learned Senior Counsel relied upon the well settled position that classification list is approved only after thorough enquiry and in such a situation no suppression can be alleged.
The learned Senior Counsel further submitted that even assuming that both the Headings 2710.19 and 2710.21 are applicable, then applying the rules of interpretation for the Tariff the Heading that occurs last should be preferred for classification as per Rule 3.
9. Shri K.K. Shroff, the learned Counsel for the Appellants submits that regarding the other aspects of the demand related to shortages, non-accountal, the Appellants have given plausible explanation for the Shortages and the discrepancies noticed by pointing out that these errors are due to pumping of the product into wrong tanks sometimes, and the dip measurements not being always reliable, as well as chances of error in conversion of the quantity material into kilograms.
Reliance was placed on certain order by Commissioner (Appeals) dated 19-2-1992 wherein the Commissioner (Appeals) has referred to the Boards instructions for condonation upto 1% of loss in storage. It was also argued by the learned Counsel that excess or loss should be set off against each other. The Appellants have also explained that there was in fact no suppression of production as the material in question has been used captively as fuel in their plant. The arguments was also made that Insan-LE has been declared as a by-product and for Modvat purposes the protection under Rule 57D(2) for by-products is available.
10. Shri S.V. Singh, the ld. DR argued the case for the department. He referred to the show cause notice in this case. Statement of N.K.Valecha, Production Superintendent of the Appellants dated 9-9-1986 to state that the product is a mixture of alcohol and Hydrocarbon classifiable under Chapter 29. The Appellants have claimed its classification under Chapter 29 knowing that it is not a separately defined chemical compound which only falls under that chapter. Again from the show cause notice the ld. DR argued that for Motor Spirit the requirement of Octane No. is 70 and the Octane No. of Insan-LE is much above that. The Appellants had not fully disclosed the nature of Insan-LE in their letter dated 8-9-1983 to the Superintendent, consequently does not indicate that it contains Hydrocarbons. On the other hand the certificate from the Chief Research Manager of Indian Oil Corporation, Shri Nanda has evaluated Insan-LE and has clearly indicated that on the basis of its characteristics the product can be used as a fuel for spark ignition engines and has a RON of 82.2 which is close to 83 RON Gasoline marketed earlier. It is said that in order to meet the current 87 RON the product can be suitably blended with TEL for use as Gasoline fuel component.
11. The ld. DR further argued that the question is to see whether the product answers the description of Motor Spirit as prescribed in the Tariff and in this context the textual Authority Kirk-Othmer encyclopedia of Chemical Technology at page 286 has indicated that products like Insan-LE can be blended into Gasoline which is specified in the Tariff heading. According to the ld. DR the opinion of Dr.
Gulati has been given to answer the query whether it is Gasoline, but the point is whether it is answering the description in the Tariff as Motor Spirit which is the point at issue. As regards the Appellants contention that the product would be classified as ATF in sub-heading 2710.21 the ld. DR pointed that they had themselves earlier claimed classification under Chapter 29 and never claimed classification under Item 7 of the old Tariff. The ld. DR also referred in this context to the Collector's finding in page 24 of his order that the product Insan-LE will not fit in with Kerosene under sub-heading 2710.21 Therefore the classification of the Item as Motor Spirit is more appropriate. The case of Cellulose Products relied upon by the Appellants the Ld. DR pointed out that, there the department had not led evidence to establish their case. Whereas, here the evaluation report of the Research Center of IOC fully supports the department's case. The ld. DR also referred to the reasoning in the Commissioner's order showing there was non-disclosure by the Appellants justifying demanding duty by invoking the longer period under Section 11A of the Central Excise Act, 1944. There was clearly non-disclosure of full particulars by the appellants. In regard to the demand arising out of the shortages noticed, the Appellants explanation that no duty is demandable on Insan-LE consumed captively is not acceptable because the goods are also cleared both on gate passes as an excisable commodity.
The ld. DR also contended that it cannot be accepted that there has to be a set-off of shortages against excess. The Commissioner has also shown that there could be no variation due to weighment difference as there was not a single instance of percentage of such type of loss observed in the past as losses due to handling.
12. We have carefully considered on the question of classification of Insan-LE. The computing Tariff Heading under old Central Excise Tariff, Item No. 6 read as follows : (i) any Mineral oil (excluding crude mineral oil) which has its flash point below twenty-five degrees of Centigrade thermometer, and which, either by itself or in admixture with any other substance, is suitable for use as fuel for internal combustion engines;" and the Central Excise Tariff Act, 1985, Heading 27.10 covers 'Motor Spirit' and it is worded as follows: "27.10 Petroleum oils and oils obtained from bituminous materials, other than crude; preparations not elsewhere specified or included, containing by weight 70% or more of petroleum oils or of oils obtained from bituminous minerals, these oils being the basic constituents of the preparations.
- Motor spirit, that is to say, any hydrocarbon oil (excluding crude mineral oil) which has its flash point below 25C, and which, either by itself or in admixture with any other substance, is suitable for use as fuel in spark ignition engines. 2710.19 Other - Kerosene (which is ordinarily used as an illuminant in oil burning lamps) and aviation turbine fuel, that is to say, any hydrocarbon (oil excluding mineral colza turpentine substitute) which has a smoke point of eighteen millimeters or more and has a final boiling point not exceeding 300C: The characteristics that the 'Motor Spirit' should satisfy for being classified as 'Motor Spirit' will be that it should be a Hydrocarbon oil and it should have a flash point below 27C and it should have either by itself or admixture with any other substance suitable for use as fuel for internal combustion engines/in spark ignition engines. The question of interpreting the expression 'suitable for use' as above in the old CET as well as in CETA had come up for consideration in the Tribunal decision in the case of Cellulose Products supra. The Tribunal has held that the meaning of the expression 'suitable' and 'suitable for use' as interpreted by the Courts in judicial pronouncements as well as the definition in Black's Law Dictionary and from another text called "Words and Phrases Legally Defined" by Butterworth it was found that the term suitable has been judicially determined to mean 'actually, practically and commercially fit for the use described. For an item to be suitable for a particular purpose within the meaning of Tariff Act the merchandise need not be chiefly used for stated purposes but there must be evidence of more than a casual, incidental, exceptional or possible use, the use must be substantial. The Tribunal found that in a U.S. Customs case it was held that 'suitable for use' as used in determining Classification of a product for Customs purposes meant actually, practically ' and commercially fit for such use and not casual, incidental or possible uses. Reliance was also placed by the Tribunal in that case on the judgment of the Alllahabad High Court in Central Distillery & Chemical Works v. Inspector -1978 (2) E.L.T. 194 wherein it was held that all kinds of ethyl alcohol will not be power alcohol i.e. to say 'Motor Spirit' within Item 6 [of] CET unelss it was also established that it is suitable for operating or running Internal combustion engines. It was observed by the High Court that the governing factor of the definition is that the product of the manufacturing process undertaken by the. Petitioner would be suitable for running internal combustion engines. It is only then it can be covered by the definition of 'Motor Spirit'.
13. In the light of the above, relating to interpretation of the Tariff which contains a criterion of suitability for use as fuel for spark ignitiorf engines, the classification of Insan-LE has to be examined with regard to determination whether its classification under 2710.19 as 'Motor Spirit' will be justified. The main reliance has been placed by the department on the opirtic given by the Research Centre of Indian Oil Corporation in their communicatioq dated 25-7-1988 to the department. The Indian Oil Corporation Chief Research Manager, Shri J.R. Nanda has informed that the sample of Insan-LE has beerj evaluated at the Centre and his report is enclosed to that communication! wherein it has been found that the product basically comprises a mixture of Hydrocarbon and non-hydrocarbon materials was present in traces only and that "the product can be used as a fuel for spark ignition engines.
The Research-Octane Number as tested is 82.2. This is quite close to the 83 RON gasoline marketed earlier. However, in order to meet the current 87 RON the produd can be suitably blended with TEL or used as a gasoline pool component". The other piece of evidence relied upon by the department is Kirk Othmer, En-: cyclopedia of Chemical Technology Vol. 14, according to which the product of the same composition as Insan-LE can be used as 'Motor Spirit'. It is stated therein under the Heading 'Oxo Process' that the Gaseous Paraffins mixed with starting olefin can be easily separated from the crude liquid product and can be re-cycled to the reactor if sufficient unreacted olefin is present, or can be used for fuel or return to the refining area. Liquid olefin-paraffin mixtures can also be recycled or can be blended into gasoline. There is also the opinion given to the department by the Chemical Examiner during the cross-examination on 19-4-1980 wherein relying on the same textual authority as above he has opined that the product can be used after blending with gasoline as 'Motor Spirit'. As against such evidence relied upon by the department the Appellants have submitted affidavit of Shri I.B. Gulati, Retired Director of Indian Institute of Petroleum, Dehradun. He has given his opinion on the basis of test reports! on Insan-LE furnished to him, on tests conducted by IPCL, IOC and from their own laboratory. He has examined the suitability of using Insan-LE stream as Motor Gasoline. He has referred to the ISI specifications for Motor Gasoline, which gives the RON of 87 minimum and mere is also a criterion of copper! strip corrosion not worse than No. 1 (3 Hrs. at 50C). Dr. Gulati has observed that Octane Number is much below the required value of 87 hence it does not| meet the minimum quality level requirements of IBS and hence is not fit to be used in the engines as motor gasoline. He has also found that it does not meet the copper strip corrosion test laid down in Indian Standard for motor gasoline. Apart from this the Appellants are relying upon the fact that IOC has not agreed to accept the Insan-LE stream from them for commercial use. Their proposal in this regard was made on 6-7-1993 to the IOC who have replied on 22-4-1994 after subsequent discussions with the Appellants regarding use of certain return streams from their works in the IOC refinery for blending into Petroleum products. The IOC has stated that after studying the characteristics of the Appellants' return streams Insan-LE/Iso Heptane and Insan-HE, the IOC found that the same are not suitable for blending into any of their finished products. This fact combined with Dr. Gulati's opinion that the material does not satisfy the specifications of ISI would go to show that there is no evidence of actual, commercial, fitness of Insan-LE for use as fuel in spark ignition engines. The opinion given by the IOC Research Centre, Shri Nanda does not indicate such practical and commercial use. In this context it is also relevant to consider the department's own understanding of the scope of sub-heading 2710.19 of the Central Excise Tariff which is reflected in the Finance Ministry's letter F. No. 528/157/93-CUS. (TU), dated 15-9-1994 on the subject of classification of Heptene and Nonene under Central Excise Tariff. The Ministry has inter alia stated that these items cannot be classified as 'Motor Spirit' under any of the sub-heading starting from 2710.11 ending with 2710.19 of the Central Excise Tariff since for all these sub-headings the criterion of suitability for use as fuel in spark ignition engine is prescribed. Ministry's letter further observed that, however, the Central Excise Tariff entry for Aviation Turbine Fuel (ATF) does not prescribe any end use but mainly defines the item with reference to technical specifications and the Ministry observed that as the product considered in that case met these technical specifications, they would merit classification as ATF under the Central Excise Tariff.
Therefore on evidence as noted above since Insan-LE does not satisfy the criterion of suitability for use as fuel in spark ignition engines, because it is not practically or commercially so used, then the claim made by the Appellants that it should fall under sub-heading 2710.21 as Aviation Turbine Fuel which does not prescribe criterion of suitability, has lot of force and has to be accepted. For being classified thereunder Insan-LE also answers the criterion being Hydrocarbon oil and also with reference to satisfying the smoke point 18 m.m. or more, final boiling point not exceeding 300C. The findings of the Commissioner in the order also indicates that it does satisfy the specifications in the Tariff Heading 2710.21 having smoke point 30 m.m. and final boiling point 175-177C. The Commissioner has also held that fuel which has a final boiling point of less than 27C would fall within the ambit of Motor Spirit 2710.19 if the same is suitable for use as fuel in spark ignition engines. He also refers to the ISI specification in this connection. But, as has been noted above, the ISI specification also includes corrosion specification and the test reports produced by the Appellants shows that it fails the corrosion test as laid down in the ISI specification. This, apart from the quality again as noted above, that the product does not satisfy the suitability criterion in the Tariff heading for Motor Spirit. Therefore in view of the foregoing discussions it is held that Insan-LE is more appropriately classifiable under Heading 2710.21 as Aviation Turbine Fuel which does not prescribe any Criterion of any end use.
14. As regards the question of limitation the show cause notice covers a period of beyond 6 months. However, it is seen that in their application for Central Excise licence the Appellants have indicated Insan-LE as one of the bye-product. The process description has also been given wherein the emergence of Insan-LE is indicated in the distillation section as light Hydrocarbon i.e. thereunder it has been stated Hydrocarbon liquid which gets separated as stock product in their first distillation column is stored and sold as Insan-LE. The Appellants have also indicated the end use of the product Insan-LE as a good solvent for rubber and other dye-stuff industries and that it is mainly used as defoaming agent. There is thus sufficient justification for the claim of { the Appellants that they have not withheld any information from the depart- ment with intention to evade payment of duty and hence it is held that the duty demand in this case has to be confined to the normal period of 6 months under Section 11A of the Central Excise Act, 1944.
15. On the question of the shortages and excess and the charge of non-accountal of production, although we are in agreement with the Commis sioner in his finding that there cannot be an automatic set-off of shortages against excess, we find that the whole issue of shortages and excess has to be re-determined in the light of the decision now given on the classification of the [ product Insan-LE. Secondly it would also be required to be considered whether the Appellants should be given the margin of 1% condonation which they claim as being prescribed and accepted by the Central Board of Excise and [. Customs.
They have referred to an order dated 19-2-1992 in their own case passed by the Commissioner of Customs & Central Excise (Appeals), Bombay. In that case the Commissioner has observed that the Board have in their letter F. No. 8/4/61/CX. 3, dated 11-4-1961 had allowed condonation up to 1% as | being condonable in respect of Motor Spirit because of loss due to evaporation during handling, filling, storage etc. In the present case it will be reasonable for ) the Commissioner to consider whether the loss percentage in this case would fall within the prescribed condonable limit and whether it could be extended to the Appellants while determining demand due to the shortages and excess \ finally. The Appellants have before us, cited another decision of the Tribunal reported in 1984 (15) E.L.T. 479 (Tribunal) to support their arguments that losses upto 1% can be condoned. It is also felt that the Commis-sioner may give fuller consideration to the applicants explanation on the 1 charge of suppression of production of goods and to substantiate their claim that the goods have in fact been captively consumed and in this regard the Appellants may be given the opportunity of furnishing of the documentary evidence on which they relied upon for substantiating such a claim. Therefore in respect of the charge of shortages, excess and suppression of production we are inclined to remand the matter to the Commissioner to re-determination of the demand in this respect in the light of the foregoing discussion. We also hold that in view of the findings that there is no ground for involving of longer period on grounds of suppression the order of confiscation of land, building, and plant and machinery under Rule 173Q(2) of Central Excise Rules should be set aside. Ordered accordingly. For the same reason the penalty on the appel-lants in the impugned order is also to be set aside with liberty to the Commis- sioner to re-determine the quantum of penalty depending on the outcome of the remanded portion of this order relating to excess, shortages and suppres-sion of production.
(i) that Insan-LE is classifiable under sub-heading 2710.21 as Aviation Turbine Fuel.
(ii) The department cannot invoke longer period for demanding duty under Section 11A in the facts and circumstances of the case.
(iii) The order confiscating the Plant and Machinery, Land and Building under Rule 173Q(2) is set aside as also the penalty in terms set out above.
(iv) The matter regarding excess, shortages and suppression of production is remanded to the Commissioner for re-adjudication in terms set out above.