1. Both the appeals are directed against the same order. The issues are also interlinked. Therefore, they were heard together on 17.11.2004 and are disposed of under this common order.
2. The appellants M/s Indian Oil Corporation (IOC) and M/s Indian Petrochemical Corpn. Ltd. (IPCL) are neighbouring industrial unit at Vadodara. IOC supplies raw naphtha to IPCL for manufacture of petro chemicals by thermal cracking. The bulk of the Naphtha so supplied gets consumed in the process of manufacture at IPCL, while some quantity remains unused. That quantity is returned to IOC, and IOC disposes it of as motor spirit after blending. Both the supply of Naphtha to IPCL and return of the unconsumed quantity to IOC are by pipeline. The return is called "Naphtha Return Stream". The payment for Naphtha by IPCL is on net quantity basis i.e. quantity originally supplied -minus - quantity returned. Naphtha is excisable. Therefore, IOC pays duty when it supplies Naphtha to IPCL. Similarly, when IPCL returns naphtha to IOC, it pays duly on the retimed quantity. Both units avail duty paid by the other as modvat credit. The Return Stream Naptha was being classified under Tariff Heading 2710.14, which is specifically for 'Naphtha'. Under the impugned order, the Commissioner held that the Return Stream Naphtha is liable to be classified under Heading 27.10.19. We read the finding in the impugned order: "I order classification of the product viz. so-called Naphtha Return Streamn by M/s IPCL which is in fact a mixture of C5 and C7 hydrocarbons generated from GOP/GAP and returned to M/s IOCL for blending in MS Pool correctly classifiable under CESH 2710.19." The finding of the Commissioner is to the effect that on extraction of certain hydrocarbons from Naphtha, the remaining quantity has ceased to be Naphtha and is required to be classified as "other items falling under Heading 2710".
3. On merits, the submission of the appellant is that the Return Stream product is also Naphtha and that it had been so recognized statutorily and that Commissioner is in error in taking a different view. Appellant has pointed out that the Chief Chemist of the Central Research Laboratory had advised that "Return Stream also falls within definition of Naphtha" in his clarification. The Chief Chemist had noted that according to IS : 4639-68, petroleum naphtha is a generic term applied to refined, partly refined or unrefined petroleum products and liquid products of natural gas, not less than 10% of which distills below 175 C and not less than 95% of which distills below 240 C when subjected to standard method of testing. It was after considering the IS : definition and other authorities that the Chief Chemist had reached the conclusion as under: "It may be seen from the description of naphtha given above as reported in technical literature on chemistry and technology of petroleum that naphtha fraction is divided into light naphtha (boiling range - 1 C to 150 C) and Heavy Naphtha (boiling range 150 -205C). Thus the 'return stream' which is in the boiling range of 70 - 105C is covered within boiling/distillation range of naphtha and it may be considered as naphtha fraction".
The appellant has also pointed out that this opinion of the Chief Chemist was accepted vide D.O.F. No. 345/4/94-TRU dated 19^th January 1995 of Commissioner -TRU to Principal Collector of Central Excise, Bombay.
4. Another point made by the appellant is that Notification Nos. 75/84, 27/89, 102/90 etc. had all treated the return stream as naphtha and therefore, the order of the Commissioner is contrary to the statutorily recognized position. It is being pointed out that under these notifications, duty was to be paid on the net quantity of naphtha consumed. All the notifications contain explanation treating the return stream as naphtha. These explanations read as under: "For the purposes of determining the quantity of raw naphtha entitled to the exemption if out of the quantity of raw naphtha received by any refinery declared as such under Sub-rule (2) of Rule 140 of the Central Excise Rules 1994, any quantity is returned after such use to any refinery declared as aforesaid for further processing and/or blending for production of finished excisable goods falling under chapter 27 of the said schedule, such quantity shall be excluded" (Notification No. 75/84).
"The amount of naphtha consumed in the manufacture of the products shall be calculated by subtracting from the quantity of naphtha received by the factory manufacturing the products the quantity of naphtha returned by the factory to a refinery, declared as such under Sub-rule (2) of Rule 140 of the Central Excise Rules, 1944 " (Notification No. 27/89).
"The amount of natural gasoline liquefied, raw naphtha or reformed naphtha (C.5 + Reformate) consumed in the manufacture of the products shall be calculated by subtracting from the quantity of natural gasoline liquefied, raw naphtha or reformed naphtha (C.5 + Reformate) received by the factory manufacturing the products, the quantity of natural gasoline liquefied, raw naphtha or reformed naphtha (C.5 + Reformate) or a mixture thereof returned by the factory to a refinery, declared as such under Sub-rule (2) of Rule 140 of the Central Excise Rules, 1944"(Notification No. 102/90).
The appellant has also submitted that the demands are time-barred inasmuch as no materials had been suppressed from the departmental authorities and no suppression of fact was involved.
5. We have perused the record and heard the learned SDR also. The view taken in the impugned order is that on account of removal of certain fractions from it though thermal cracking, the naphtha which was received from IOC has ceased to be naphtha. This finding is contrary to the opinion of the Chief Chemist which the Central Board of Excise had accepted. The Chief Chemist had considered the various criteria contained in IS : and other authorities and had reached the conclusion that naphtha being a generic term it covers a product range falling within the boiling distillation range indicated in his report. The Commissioner was not justified in going against the accepted opinion of the Chief Chemist. The appellants are also right in their contention that there was a statutory recognition of return stream as naphtha vide explanations to various notifications. These explanations providing for treating the quantity of naphtha consumed as naphtha eligible for exemption is a clear acceptance that the return stream is also naphtha only. It is to be noticed that the notifications gave the same treatment even when the returned product needed blending or when it was a 'mixture' of petroleum products. Even though these notifications were in force prior to the period of the present dispute, we are of the view that there is no material difference between the two periods so as to warrant assigning a different scope for the product 'naphtha'. Given the background of such statutorily recognisation, it is also not justifiable to hold that appellant had suppressed any fact with intent to evade payment of duty.
6. In the view we have taken above, the demand of duty or denial of credit are not justified. In the absence of duty or wrong taking of modvat credit, penalty and demand for interest are also not justified.
Accordingly, we set aside the impugned order and allow the appeal with consequential relief, if any to the appellant.
1. While concurring with the order proposed by my learned brother, I would like to elaborate on certain points.
2. As the facts have already been detailed in the order of Ld. M (T), the same are not being discussed here to avoid repetition. The core issue in the present appeal is as to whether 'return stream naptha' is naptha, thus earning its clarification under heading 2710.14 or the same has to be classified under heading 2710.19 as 'other'. For better appreciation of the two contending entries, the same are reproduced below :- "2710 Petroleum oils and oils obtained from bituminous minerals, 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;2710.11--Special boiling point spirits (other than Benzene 20% Tolale) with nominal boiling point range 55-115 C2710.12--Special boiling point spirits (other than Benzene, 20% Benzol, Toluene and Toluol) with nominal boiling point range 63-70C2710.13--Other special boiling point spirits (other than 20% Benzene, 20% Benzol, Toluene and Toluol)2710.14--Naptha 10%2710.15--Natural Gasoline Liquid2710.19--Other 20%2710.90--Other 10%" 3. Evidentially, entry 2710.19 is a residuary sub-classification of the goods falling under main heading 2710. As per rules of interpretation, an item would fall under a residuary entry, if it is not specifically covered by way of the precedent entries. Thus, if 'return stream naptha' is considered to be naptha, it would definitely fall under entry 2710.14 in as much as naptha is specifically mentioned therein.
4. Shri. Nair has already dealt with the chief chemist's report which is based on IS specification and other technical books. The said report was obtained by CBEC (Tan Research Unit) and was accepted by the department. In fact, the naptha received by M/s. IPCL from M/s. IOC is heavy naptha (having higher boiling range of 150 C to 205 C) which is subjected to the process of thermal cracking at the end of M/s. IPCL, resulting in emergence of olefinic rich gases, pyrolysis gasoline and pysolysis fuel oil. The olefic rich gases are further subjected to various processes to obtain ethylene, propylene and mix C4. The pyrolysis gasoline is further processed to obtain benzene and remanant streams are either recycled or returned to IOCL as 'naptha return stream'. The pyrolysis fuel oil is taken out as carbon black feed stock.
5. What remains after the completion of thermal cracking process is light naptha having boiling range of 1C to 150 C. As per the chief chemist report the return stream naptha is in the boiling range of 70 - 150C. So at the most it can be said that what was received by M/s.
IPCL was heavy naptha and what was returned was light naphtha.
Nevertheless, both were 'naptha' and the entry 2710.14 does not make any difference between heavy naptha and light naptha. Light Naptha also being naptha, would get classified under heading 2710.14.
At this stage, we may also refer to various technical books defining and specifying the term 'naphtha' as detailed by M/s. IPCL in their appeal memo.
MCGRAW - HILL DICTIONARY OF SCIENTIFIC & TECHNICAL TERMS (FIFTH EDITION) 1. Petroleum fraction with volatility between gasoline and kerosene; used as gasoline ingredient, solvent for paints and rubber, and cleaning solvent.
2. Aromatic solvent coal tar, either solvent naptha or heavy naphtha.' (I) Hydrocarbons, C[6]H[14] to C[7]H[18], b. 70-90, from the distillation of petroleum, coal tar, and shale oil. (2) Gasoline.
(3) A bitumen, q. v. boghead Photogen.
Coal tar-- Mainly benzene and its homologs. Petroleum - Mainly alkanes and naphthenes distilled from crude oil.
Shale-- Ligroin. It contains alkenes and alkanes. Solvent - A coal tar distillate.
Wood --Mainly methyl alcohol and acetone, obtained by the distillation of wood; a solvent and denaturant for alcohol'.
A mixture of light hydrocarbons which may be of coal tar, petroleum or shale oil origin. Coal tar naptha (boiling range approx. 80- 170C) is characterised by the predominant aromatic nature of its hydrocarbons. Generally petroleum naphtha is a cut between gasoline and kerosene with a boiling range 120-180 C, but much wider naphtha cuts may be taken for special purposes, e.g. feedstock for high temperature cracking for clearing manufacture. The hydrocarbons is petroleum naphthas are predominantly aliphatic." In the case of naphtha, we have to live with an unfortunate confusion of terminology. The term has somewhat different meanings in the oil industry and the petrochemical industry. In the petrochemical industry, any petroleum fraction in the approximate boiling range 20 to 200 C which is used as a feedstock is called naphtha. Thus, if the fraction called light gasoline in Table 1.3 was being used as feedstock for ethylene manufacture, it would be called light naphtha. Henceforth, when the term naphtha is used, it will be in the petrochemical sense.
Naphthas are mixtures of alkanes, cycolalkanes and aromatic hydrocarbons in proportions which vary considerably depending on the type of oil from which the naphtha was derived. A 'full range' naphtha, boiling range approximately 20 to 200 C, would contain compounds with from 4 to 12 carbon atoms." 6. There is no definition of naphtha in the Central Excise Tariff Act.
As such, the understanding of the term as given in technical books along with the report of the Chief Chemist has to be adhered to, according to which the material returned to IOCL is nothing but naphtha.
The various notification issued by Govt. of India, as already discussed in the order of Ld. M(T) also strengthens our view that return stream naptha is nothing but naptha.
Reference here, may also be made to the correspondence between CBEC and the various collectors as detailed by the appellant in ground G-6 and G-7, reproduced below for ready reference.
"G.6 In response to the aforesaid letter of the Central Board of Excise and Customs, the principal Collector vide his letter dated 13.03.95 (Annexure -21) informed the CBEC that he had asked the respective Collectors to re-examine the issue in view of the Chief Chemist's opinion and enclosed the copy of the reply received from the Collector, Mumbai II as well as Collector, Mumbai-III. Both the Collectors had unanimously agreed with Chief Chemist's opinion and Collector, Mumbai II had also indicated that he had dropped the proceedings initiated in the show cause notice dated 02.11.1994 issued to one of the assessee namely, Reliance Industries Ltd. and Bharat Petroleum Corporation Ltd, The principal (Collector accordingly felt that the issue regarding return stream of raw naphtha stands resolved and both the aforesaid units can follow the modvat route.
G.7 The process carried out by the aforesaid two assessee on the naphtha is similar to the process carried out by the appellants on the naphtha. In any case, the naphtha had been processed by these assessee and thereafter the return stream is cleared. Even then the department had accepted the return stream as naphtha." 7. Non acceptance of these exchanges by the Commissioner on the ground that these documents were internal communications is not appreciated in as much as these documents though not circulated for public benefit but reflecting upon the department's understanding and highlighting the Board's, which is the Apex body, can be relied upon by the assessee in support of their case.
Apart from the fact that demand is not sustainable on merits, it is also seen that the same is hopelessly barred by limitations. From the sequence of evidences narrated above it is clear that after the goods falling under Chapter 27 were introduced to modvat scheme, a doubt has arisen about the correct classification of return stream naphtha.
Samples were taker and the opinion of the Chief Chemist was sort. Such opinion was taken by the CBEC and was also circulated to the Principal Collector of Central Excise, Mumbai, who in turn forwarded it to the Collectors, who uniformly agreed to the Chief Chemist's opinion and in some cases dropped the proceedings against the other assessee similarly situate. As such, it is evident that the problem of return stream naphtha was under the consideration of the various field formations in which case it cannot be alleged that mere was suppression on the part of the appellant, which is justifying invoking of longer period of limitation. Proceeding in respect of the quantity of naphtha used by M/s. IPCL were also initiated against the said appellant in the past, as regards the denial of the concessional rate of duty which disputes were settled by Honourable Supreme Court decision as reported in 1997 (92) ELT 294. In these circumstances it cannot be concluded that the department was not aware of the proceeding of the return of Naphtha to the refinery. Similarly, in other proceeding against the said appellant, as regards the correct classification of pyrolysis, gasoline etc; the entire process was examined and was taken note off. As such it would be unfair to conclude that the fact of return of naphtha after the process of thermal cracking, at any point of time, was not in the knowledge of revenue. As such, we are of the view that the demand having been raised beyond the normal period of limitation is time barred.
8. As we have already held that the return stream naphtha is appropriately classified under sub heading 2010.14, the denial of modvat credit of duty paid on the same by IPCL to IOCL Ltd., on the ground that heading 2710.19 is not covered by modvat scheme, cannot be upheld. For the same reason penalties imposed upon both the appellants are also liable to be set aside.
9. In a nutshell, the impugned order is set aside and the appeals are allowed by way of consequential relief to the appellants.