2019 (11) TMI 778 - HC - Customs

Advance Authorization scheme - SION - allegation that the party had mis-declared that the exported product has been manufactured out of LSFO - exemption denied on the ground that the said import had been made in violation of para 4.1.15 of the Foreign Trade Policy - It was 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 HELD 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 300o C 570o C, whereas the boiling point of water is 100o 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. Ash percentage - HELD 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 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. Parameter of flash point - HELD THAT - It is expected to generate sufficient vapours which form combustible mixture at around temperature of 150o C or more. Hence, the specification of minimum 66o C will necessarily be met. Parameter of sediment percentage by mass - HELD 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. Water content - HELD THAT - 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 230-380o C). Water would have evaporated earlier at around 100oC mark. Hence, water content is not expected in LSFO (FCC Feed). 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. 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 - the adjudicating authority has 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. Sweet VGO used in the manufacture of motor spirit meets with the specification of LSFO as prescribed by BIS 1593-1982 - HELD THAT - 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. 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 - In the absence of any substantial question of law arising out of the impugned order passed by the Tribunal, the appeal fails and is, accordingly, dismissed.

Summary

Issues Involved:
1. Applicability of para 4.1.15 of the FTP to Advance Authorisation issued prior to 01.08.2013.
2. Requirement of using permissible inputs specified in SION for manufacturing export products.
3. Classification of Low Sulphur Fuel Oil (LSFO) and Vacuum Gas Oil (VGO) as the same or different products.
4. Validity of testing only 2-3 parameters out of the 9 specified under IS 1593:1982.
5. Admission of fresh evidence by the Tribunal at a belated stage.
6. Rejection of statements of technical employees recorded under Section 108 of the Customs Act.
7. Rejection of technical opinion of Joint Director CRCL.
8. Application of the ratio of the Punjab and Haryana High Court judgment in Pushpanjali Floriculture Pvt. Ltd. to the case.
9. Framing of the question regarding the requirement of manufacturing export products using permissible inputs.
10. Tribunal’s decision on the impossibility and illogicality of the requirement that export goods should be produced only by using permissible inputs.
11. Reliance on the judgment of the Punjab and Haryana High Court while the DGFT’s appeal is pending before the Supreme Court.
12. Applicability of BIS 11489:1985 parameters for considering Fuel Oil as LSFO.
13. Role of Joint Director CRCL in interpreting LSFO specifications.
14. Tribunal’s jurisdiction and the provisions of the Customs Act under section 28(4) and Section 108.
15. Justification for not imposing a penalty under Section 114(iii) of the Customs Act.

Detailed Analysis:

1. Applicability of para 4.1.15 of the FTP to Advance Authorisation issued prior to 01.08.2013:
The court examined whether the provisions of para 4.1.15 of the Foreign Trade Policy (FTP), introduced by DGFT Notification No.31(RE-2013)/2009-2014 dated 01.08.2013, applied to Advance Authorisation issued before that date. The court noted that the Advance Authorisation in question was issued on 06.05.2013, prior to the introduction of para 4.1.15, and determined that the retrospective application of this provision was impermissible in law. The court relied on the Punjab and Haryana High Court’s decision in Pushpanjali Floriculture Pvt. Ltd., which held that imports made after 01.08.2013 using DFIA issued before that date could not be subjected to the additional restriction imposed by the DGFT notification.

2. Requirement of using permissible inputs specified in SION for manufacturing export products:
The court discussed whether the Advance Authorisation Scheme required the use of permissible inputs specified in the relevant Standard Input Output Norms (SION) for manufacturing export products. The court found that the DGFT Circular 72(RE-08)/2004-09 clarified that SION aimed to allow duty-free imports of inputs actually used or capable of being used in export products. The court held that the assumption that LSFO must be used in manufacturing export products was incorrect.

3. Classification of LSFO and VGO as the same or different products:
The court analyzed whether LSFO and VGO were the same product or different products based on their classification under the Harmonized System of Nomenclature (HSN) and SION. The court noted that VGO met the specifications of LSFO as per IS 1593:1982 and was, therefore, considered LSFO. The court found that the respondent’s explanation that VGO, used as FCCU feed stock, was LSFO meeting all specifications of LSFO was credible.

4. Validity of testing only 2-3 parameters out of the 9 specified under IS 1593:1982:
The court examined whether testing only 2-3 parameters out of the total 9 specified under IS 1593:1982 was sufficient. The court found that the respondent had provided a technical note explaining how compliance with the remaining four parameters (ash, acidity, sediment, and water content) could be inferred or derived from property stream calculations. The court accepted this explanation and found that the respondent had met all the parameters laid down in IS 1593:1982.

5. Admission of fresh evidence by the Tribunal at a belated stage:
The court did not find any issue with the Tribunal admitting fresh evidence in the form of a technical note at a belated stage, as it was relevant to the case and helped in understanding the technical aspects.

6. Rejection of statements of technical employees recorded under Section 108 of the Customs Act:
The court noted that the Tribunal had rejected the statements of technical employees recorded under Section 108 of the Customs Act, as they were not found to be reliable or relevant in determining the classification of LSFO and VGO.

7. Rejection of technical opinion of Joint Director CRCL:
The court found that the Tribunal was justified in rejecting the technical opinion of the Joint Director CRCL, as the respondent had provided sufficient evidence and explanation to establish that VGO met the specifications of LSFO.

8. Application of the ratio of the Punjab and Haryana High Court judgment in Pushpanjali Floriculture Pvt. Ltd. to the case:
The court agreed with the Tribunal’s application of the ratio of the Punjab and Haryana High Court judgment in Pushpanjali Floriculture Pvt. Ltd., which held that the retrospective application of para 4.1.15 of FTP was impermissible.

9. Framing of the question regarding the requirement of manufacturing export products using permissible inputs:
The court found that the Tribunal was correct in framing the question of whether export products were required to be manufactured from permissible inputs, as it was relevant to the case and helped in determining the applicability of para 4.1.15 of FTP.

10. Tribunal’s decision on the impossibility and illogicality of the requirement that export goods should be produced only by using permissible inputs:
The court agreed with the Tribunal’s decision that the requirement that export goods should be produced only by using permissible inputs was illogical and impossible to comply with, as it did not reflect the actual manufacturing process.

11. Reliance on the judgment of the Punjab and Haryana High Court while the DGFT’s appeal is pending before the Supreme Court:
The court noted that the Tribunal’s reliance on the judgment of the Punjab and Haryana High Court in Pushpanjali Floriculture Pvt. Ltd. was justified, even though the DGFT’s appeal was pending before the Supreme Court, as the judgment was still valid and applicable.

12. Applicability of BIS 11489:1985 parameters for considering Fuel Oil as LSFO:
The court found that the Tribunal was justified in holding that the parameters framed under BIS 11489:1985 for considering Fuel Oil as LSFO were not applicable in the instant case, as the respondent had met the specifications of LSFO as per IS 1593:1982.

13. Role of Joint Director CRCL in interpreting LSFO specifications:
The court agreed with the Tribunal’s decision that the Joint Director CRCL had gone beyond his role of testing samples and reporting test results by offering his own interpretation and views on what LSFO is.

14. Tribunal’s jurisdiction and the provisions of the Customs Act under section 28(4) and Section 108:
The court found that the Tribunal was acting within its jurisdiction and was correct in its interpretation of the provisions of the Customs Act under section 28(4) and Section 108.

15. Justification for not imposing a penalty under Section 114(iii) of the Customs Act:
The court noted that the question of imposing a penalty under Section 114(iii) of the Customs Act did not arise in the present appeal, as it was related to the revenue’s appeal before the Tribunal.

Conclusion:
The court dismissed the appeal, finding no substantial question of law arising out of the impugned order passed by the Tribunal. The court held that the Tribunal’s conclusions were based on findings of fact recorded after appreciating the material on record and that there was no perversity in the findings.