1997 (1) TMI 76 - SC - Central Excise

Whether for the purpose of classification under Item 11AA(2) a product should be derived directly from the refining of crude petroleum? Held that - The use of the words derived from in Item 11AA(2) suggests that the original source of the product has to be found. Crude petroleum is refined to produce raw naphtha. Raw naphtha is further refined or cracked to produce the said products. This is not controverted. It seems to us to make no difference that the appellants buy the raw naphtha from others. The question is to be judged regardless of this and the question is whether the intervention of the raw naphtha would justify the finding that the said products are not derived from refining of crude petroleum . The refining of crude petroleum produces various products at different stages. Raw naphtha is one such stage. The further refining or cracking of raw naphtha results in the said products. The source of the said products is crude petroleum. The said products must therefore be held to have been derived from crude petroleum. In favour of assessee.

Summary

Issues: Proper construction of the words "derived from" in the context of excise classification under Item 11AA of the Excise Tariff.

The judgment pertains to an appeal against a decision of the Customs, Excise & Gold (Control) Appellate Tribunal regarding the classification of certain products under the Excise Tariff. The dispute revolves around whether the products manufactured by the appellants, namely ethylene, butylene, and propylene, fall under Item 11AA of the Excise Tariff or should be classified under the residuary Item 68. The central issue is the interpretation of the words "derived from" in Item 11AA(2) in relation to the source of the said products. The appellants claim exemption under a Notification applicable to goods falling under Item 11AA. The Revenue argues that the products are not directly derived from the refining of crude petroleum but from raw naphtha, thus falling under Item 68.

The Tribunal, relying on a Gujarat High Court judgment, held that for a product to be excisable under Item 11AA, it must be the immediate result of the refining of crude petroleum. Since the products in question were obtained from raw naphtha purchased from oil refineries, the Tribunal concluded that they were not directly derived from crude petroleum and classified them under Item 68. In contrast, the appellants argue that the products were indeed derived from the refining of crude petroleum, emphasizing the source of the raw naphtha as an intermediate product in the refining process.

The appellants draw parallels with a Supreme Court judgment related to an Exemption Notification for soap manufacture, emphasizing the broader interpretation of the notification's language to achieve the intended purpose. They contend that the raw naphtha's origin from other factories does not negate the products' derivation from crude petroleum. Additionally, they challenge the Tribunal's classification based on the commercial perspective of the raw naphtha as a separate commodity.

The Supreme Court analyzes the term "derive" and its association with the phrase "derived from," highlighting its meaning of tracing back to a source or origin. Applying this understanding to the case, the Court concludes that the said products, though involving raw naphtha as an intermediate, ultimately stem from the refining of crude petroleum. The Court rejects the Tribunal's classification, deeming it erroneous on the fundamental issue at hand, thereby allowing the appeal and setting aside the Tribunal's decision.

In conclusion, the Supreme Court's judgment clarifies the interpretation of "derived from" in the context of excise classification, emphasizing the source of the products in question as the determining factor. The decision underscores the direct linkage of the products to the refining of crude petroleum, overriding the intervening role of raw naphtha in the manufacturing process.