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TMI Blog2019 (6) TMI 1426X X X X Extracts X X X X X X X X Extracts X X X X ..... vance Authorization. They were issued show cause notice dt. 08.12.2016 alleging that they have 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 dt. 01.08.2013 issued by DGFT readwith para 4.1.15 of FTP 2009 - 14. It was alleged that the Appellant has not used LSFO as an input in the export goods but has used VGO (Vacum 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 dt. 11.09.2009 against the Advance authorizations and has thus contravened the provisions of Rule 14 of Foreign Trade (Regulation) Rule 1993. It was proposed to demand customs duty on goods imported by them under Advance Authorization under Section 28 (4) alongwith interest under Section 28AA and penalty u/s 112 (a)/114 A and 114 (iii) of Customs Act. Vide impugned order the exemption availed by the Appellant towards importation of Low Sulphur Fuel Oil (LSFO) against Advance Authorization scheme has been denied on the ground that the said import had been made in violation of para 4.1.15 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts such as LPG, motor spirit, etc. In order to optimally utilize the spare FCCU capacity, they 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. They first completed their export obligation against the subject Advance Authorization and another Advance Authorization dt. 08.05.2013 by exporting a quantity of 55,034 metric tonnes of Motor Spirit. Post export of motor spirit, they 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. The department conducted investigation in October 2015 and recovered internal records of the refinery showing that in respect of 4 storage tanks, the name (service details) was changed on 14.9.2013 from VGO and VR (Vacuum Residue) to LSFO (FCCU FEED). Several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance 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. In case of first assumption he submits that neither the Advance Authorization nor the FTP nor the Customs Notification either existing at the relevant time when the import was made, or even today, require export goods to be manufactured only by using duty free inputs. He places reliance on 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. He therefore submits that the first assumption of the impugned order that LSFO ought to have been actually used in manufacture of export product was totally incorrect. In respect of second assumption that whether para 4.1.15 was at all applicable in the present case, he submits that as per the impugned order, the requirement of manufacturing export goods only from permissible inputs was introduced in the FTP only vide DGFT Notification No. 31/(RE-2013)/2009-14 dated 1.8.2013, by which para 4.1.15 was added. The show cause noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 9.8.2016 and a statement dated 3.8.2016 of Mr Chakrapany Manoharan, Director (Refinery) of the Appellant company is cited by him 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. A statement of Mr Shreedhar Rudraraju as also the record of cross-examination of various refinery personnel is relied upon by him in support of this submissions. He submits that as per the above statements and record of cross examination, VGO is a specific variety of LSFO having low sulphur content (much less than 1%), and met the specification 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. He submits 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. That some varieties of VGOs are described as low Sulphur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage price of the generic product. Citing examples, the Ld. Counsel submits that the term "paper" is a generic description which covers all kinds of papers starting from the inferior varieties such as news print, waste paper and ending with the best variety bond paper. While marketing bond paper the seller would obviously describe it as "bond paper" and not as "paper". The same person while selling newsprint, may market it by its generic name "paper". Another example cited was that of Aviation Turbine Fuel (ATF) which, though a kind of superior kerosene oil (SKO), is always marketed as ATF and not as SKO. Likewise, 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. That such fundamental point has been totally overlooked by the lower authorities and the conclusion in the impugned order that VGO is not LSFO is therefore totally erroneous, fallacious and illogical. 2.2 He submits that the finding of the adjudicating authority that VG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l ratio in which inputs are used for manufacturing export products. Elaborating on this, he 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 in the manufacturing process, but is only the ratio in which duty free entitlement has been allowed. It was pointed out that it was physically impossible to produce 1 MT of motor spirit using only 1.265 MT of LSWR/LSFO. He pointed out that in actual practice about 5 MT of LSFO is required to produce 1 MT of motor spirit, as several co-products such as SKO, LPG, HSD also emerge together with MS. Hence, while working out the duty free entitlement for 1 MT of MS exported, the quantity of duty free entitlement gets reduced from 5 MT to 1.265 MT considering the realizable economic value of other co-products, such as SKO, LPG and HSD, which are not being exported. He also referred to a report of Dr S. Ganguly, Chairman of the Expert Committee constituted by the Department of Chemicals and Petroleum, for the purpose of recommending the input/output norms of Naptha. According to the said report, in cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue before the Apex Court and an SLP had been admitted and is pending consideration of the Hon'ble Apex Court. Though no stay had been granted, the correctness of the conclusion reached by the High Court is still at large. He further submits that the Appellant has failed to prove that VGO produced within its refinery and used as FCCU feed stock was meeting all the specifications of LSFO as per IS 1593:1982 The in-house test reports did not contain test findings for acidity, ash, sediments and water content which was also a requirement if IS: 1593:1982 and therefore the Appellant's contention that sweet VGO was also LSFO had not been proved. He also refers to the fact that the Appellant themselves had exported LSFO and VGO in the past declaring them as LSFO and VGO respectively which established that the two products were understood differently in trade. While exporting VGO in the past, Appellant had not classified the same under the classification entry for fuel oil. 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. Dealing with the question of bonaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uts which were actually used in the manufacture of export product. The DFIA in that case was issued prior to 1.8.2013. It was Revenue's contention that since imports were made after 1.8.2013, the restrictions imposed in the FTP w.e.f. 1.8.2013 would apply to all such imports even if they were being made against an DFIA issued prior to 1.8.2013. After taking note of the judgment of the Apex Court in the case of DGFT vs Kanak Exports the High Court held that the imports made against DFIA issued prior to 1.8.2013 could not be subjected to the restrictions contained in para 4.1.15. The relevant paras of the said judgment are as under: 30. Even on first principles, we find that neither Section 5 of the Foreign Trade (Development and Regulation) Act, 1992, nor Para 1.2 of the FTP, whereunder the impugned Notifications dated 1-8-2013 and 21-8-2014 purport to have been issued, allow retrospective divesting, by any newly added provision, of the rights already available to the License holder/subsequent transferee, of the DFIA. It is well-settled that the power to legislate retrospectively is not inherent, and has to be specifically conferred by statute no such power seems to emanate, eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said DFIAs read with the then existing FTP, HOP and DGFT Circulars, etc., would be available thereunder. It was on the basis of this promise, as held out by the respondent, that the petitioner invested considerable amounts in purchasing the said DFIAs from the original holders thereof in the belief that import benefits available to the said DFIAs at the time of issuance thereof would not be denied to it merely by erroneously applying the restrictions which were introduced thereafter. 37. To the said extent, therefore, the impugned Notifications, Public Notice and Circulars, insofar as they make the restrictive conditions incorporated therein applicable to all imports made thereafter, even under DFIAs issued prior thereto, cannot sustain. The impugned DGFT Circular dated 2-8-2013 is also, consequently, illegal, insofar as it makes the Notification dated 1-8-2013 (supra) applicable to all imports effected under the DFIA scheme thereafter. 38......... 39. That apart, as already indicated herein above, said clause (b) of Para 4.1.15 cannot be used to restrict or limit the entitlement under DFIA, which existed on the date of issuance of DFIA under the FTP, HOP, DGFT Circular d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us entitling him to challenge the applicability of the amending Notification also on the ground of promissory estoppel, we note that the conclusions reached by the Hon'ble High Court in the above extracted passages are not premised on the principle of promissory estoppel. This is clear from para 36 of the judgment by where the doctrine of promissory estoppel was cited only as an additional ground to support the conclusion otherwise reached by the Court independent of that doctrine. We note that the primary basis for the conclusion reached by the High Court was the absence of the power in the Foreign Trade (Development & Regulations) Act 1992 (FTDR) to legislate retrospectively. The judgment also relied upon the provisions in the FTP cited in para 32 of the judgment which state that DFIA and Advance Authorization have to be issued in accordance with policy and procedure in force on authorization issue date. Para 4.1.7 of the FTP dealing with Advance Authorization was cited by the High Court and the same reads as under: "Advance authorization shall be issued in accordance with Policy and procedure in force on Authorization issue date." The conclusion reached by the High Court was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant bill of entry, the concerned Authorization will not be redeemed. In other words, the name/description of the input used (or to be used) in the Authorization must match exactly the name/description endorsed in the shipping bill. At the time of discharge of export obligation (EODC) or at the time of redemption, RA shall allow only those inputs which have been specifically indicated in the shipping bill." 5.4 We find that Para 4 of the DGFT Notification having been struck down by the High Court and thus the very basis of the proceedings of the present case has become untenable. We find that the Commissioner's understanding of para 4.1.15 and the DGFT Notification dated 1.8.2013 is summed up in para 34.4.5 of the order wherein he has contended that "the said Notification implies that inputs actually used in manufacture of the export product should only be imported under Authorization and similarly inputs actually imported must be used in the export product." Based on such understanding the Commissioner has concluded in para 34.4.6 that "imported materials so permitted could be utilized only for the manufacture and export of the resultant products by importer for discharge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ydrocarbon oil conforming to the Indian Standards Specification of Bureau of Indian Standards IS : 1593 : 1982 5.7 It is not in dispute that BIS standards 1593:1982 for fuel oils also cover LSFO. The Adjudicating authority in fact proceeded on this basis in para 38.2 of the impugned order. We note that above statutory definition which uses the word 'means' lays down an objective definition of LSFO as referring to any hydro carbon oil conforming to BIS standards IS 1593:1982 with the added condition of the sulphur content being low. This statutory definition will prevail over any contrary meaning existing in the common trade parlance or the internal terminologies used within the refinery. The impugned order findings in para 35 of the order is mainly based on such trade parlance and the refinery parlance appearing in the internal records of the refinery, wherein VGO and LSFO are treated differently. In our view such understanding is not determinative of the issue. It is elementary that a product may be known and described either by its specific name or by its generic name. Further, different people and trade entities in different parts of the world describe a product by different vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h that VGO was conforming to all the prescribed specifications for LSFO. The Appellant on the other hand has submitted, relying upon statements recorded in the course of investigations that 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 as stated by Mr Shreedhar Rudraraju in his statement dated 8.8.2016 which reads thus: "On being asked as to what parameters were put to check while giving a go-ahead by EPS, I state that the Technical Services and Operations Group gave their clearance on the 04 parameters based on the Test of FCCU combine feed that the refinery conducted on regular basis to ascertain as to whether the combine feed is fit to be used as a FCCU Feed or not. The other parameters such as ash, sediments, viscosity, water, etc were confirmed based on our inferred or derived stream property calculations. On being asked as to whether while confirming the said parameters, any chemical or physical testing of the samples were done or not, I state that no such testing was done and these parameters are arrived b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h could have been justified, if the goods were still, awaiting exports and were available for examination. Once export of goods has been permitted by the Customs by accepting the declaration made in the Shipping Bill, the burden of proving that such a declaration was false would squarely rest upon the Revenue. Therefore, even if we were to ignore the technical note given to us, the case of the Revenue cannot sustain and the burden of proof resting upon the Revenue had not been discharged. 5.13 Going further on question of burden of proof we find, that in the show cause Notice the Revenue had tried to discharge this burden by relying upon several statements of refinery personnel and also the internal records of the refinery showing that the description of four storage tanks No.503A, 503B, 503C, 503D was changed on 14.9.2013 from VGO/VR to LSFO. The Appellant, on the other hand relied upon the statements given by Mr Shreedhar Rudraraju, Chief Planning officer and Mr. Chakarapany Manoharan, Director Refinery wherein both had pointed out that VGO was conforming the BIS standards for LSFO and had also produced inhouse test reports to substantiate this claim. When Mr Shreedhar Rudraraju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feed coming from three tanks is only for balancing the feed. The major stream is sweet VGO from VGOHT and Sour VGO from Crude Units. Q6. I put it to you that during the period Sept-Oct 2013 when Motor Spirit was exported under the disputed advance licence, the percentage of FCC feed from the three tanks mentioned above was around 15% only, the rest being from VGOHT (48%) and from CDU-I (23%). Is this correct ?. If so, why was this fact not put in your statement ? A6. These figures are correct and they corroborate my earlier reply. In the course of DRI enquiries, answers are required to be given only to specific questions put to you and further clarifications like this are not recorder. 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 clarify now?. 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. Q8. Sir, Is it generally less than 1% or can it exceed 1% A8. It is much lower than 1%. Q9. Is it therefore correct to say that MS produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A5. I would like to clarify that I was not in Operations department during the said period. Q6. In your statement you were questioned about the change in nomenclature of storage tank from "VGO" to "LSFO" on 14.09.2013 but you have not commented whether the said change was proper or not. Can you clarify?. A6. I did mention that VGO meets specification of LSFO i.e. FCC Feed. I was however told that I should restrict the answers only to the questions asked. Q7. In your statement you have not clarified what percentage of Sulphur constitutes a threshold for describing the product as LSFO. Can you clarify now ?. A7. There are no norms or rules available to define fuel oil as either low Sulphur or high Sulphur. There is an Indian Standard which specify fuel oil viz: IS:1593. This Standard stipulates that a buyer and seller can mutually decide the sulphur requirement of LSFO, subject to a maximum of 3.5%. Q8. In trade what percentage of Sulphur is being accepted as a threshold of low Sulphur fuel oil? A8. I will not be able to specify a number for sulphur content of LSFO. As far as our FCC is concerned, we used to process upto 2% sulphur as LSFO (FCC feed). Q9. In the stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and lead fresh evidence. The bar against producing fresh evidence or accepting new submissions exist only in Appellate proceedings, and not to original proceedings of adjudication of a show cause notice where it is the assessees' right to make submission and lead evidence . Such submissions cannot be ignored and brushed aside on the ground that it was not made in the course of investigation. If the Commissioner had doubts about the correctness of the Appellant's claim, with regard to compliance of the four parameters, the Commissioner could have got the matter verified by directing withdrawal of samples of the intermediate products. As it is nobody's case that the refinery processes and product quality has undergone any change between the time when export goods were produced and the time when the Commissioner adjudicated the case. Instead of making any such effort, the Commissioner has chosen to cast an absolute burden of proof upon the Appellant which, in the circumstance explained above was neither reasonable nor legally justified. 6 The third point that the Adjudicating authority has made for disbelieving the testimonies in cross examination is the absence of retraction or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification of the product in future. We are of the view that matters of classification have to be decided with reference to the statutory provisions and definition and not merely on the basis of what the department or the assessee claimed or did in the past. 6.2 The Commissioner has recorded a finding in para 38.3 of the order that as per the appellant's own submission LSFO and VGO have distinct use, marketability and description. This finding is not correct as the Appellant's submissions in its replies and written submissions do not contain any such admission. Probably the Commissioner was referring to the statements of the refinery's personnel recorded in the course of investigation. Such statements of the company's employees cannot be regarded as the submissions of the Appellant company. The submission of an Appellant are those which are made in the reply to the show cause Notice. Further, in any event statement's made in the course of investigation have to be read alongwith the depositions made in the cross examination. In the cross examination all the concerned personnel has stated that VGO is also a type of LSFO. Significantly, even Mr Chakrapany Manoharan in his statement re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on between permissible inputs and export product. This para only aims to prevent duty free import of totally unconnected and different type of inputs than what was actually used in the export production. In our view, the Commissioner has totally misinterpreted this provision of the FTP. 7 The Commissioner has also observed that according to the statements of the refinery personnel the technical specifications of VGO and LSFO were different. We note that this observation is not entirely true in view of the two crucial statements that we have referred to repeatedly in this issue. Even otherwise, in any situation where a specific superior variety of a product from out of a generic class of product will always have its own specific specifications. The technical specifications of the generic group of products will be in broader range sufficient to cover the specification of the superior variety. Thus, the observations of the Ld. Adjudicating authority based on the statements that technical specifications of VGO and LSFO were different is not really relevant. What needed to be examined is whether the technical specifications of the specific product fell within the range of the wider spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that the one percent criteria cannot be applied as BIS 11489:1985 applies only to heavy petroleum stock and not to fuel oils. As observed by us in para 7 above, the IS standard 1593:1982 for LSFO does not prescribe any upper limit for the sulphur content and leaves the same to the contracting parties to decide. An upper limit for sulphur content (3.5 to 4.5) exist only for normal fuel oils covered by the same standard. When no upper limit has been prescribed in the said standard for LSFO, we are of the view that both the Appellant as well as the Commissioner are wrong in debating about the precise upper limit of sulphur content (1% or 2%). The Commissioner is therefore not correct in assuming that the upper limit for sulphur content in LSFO is 1%. We also find that the upper limit of 1% for sulphur content in standard BIS 11489 - 185 <11489185> is totally inapplicable as that BIS applies to a totally different product namely heavy petroleum stock and not to LSFO. We also find that the opinion of Joint Director, Customs laboratory Shri Rajaraman Dhasharathan justifying the application of BIS 11489:1985 to LSFO is totally unacceptable, particularly in view of the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X
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