Whether supplies made to intermediates eligible for exemption if intermediates further supplied goods to Indian Navy?

Case:- M/s HINDUSTAN PETROLEUM CORPORATION LTD Vs COMMISSIONER OF CENTRAL EXCISE, MUMBAI-II

Citation:- 2014-TIOL-149-CESTAT-MUM

Brief facts:- The appeals are directed against orders-in-original nos. 07/Commr/M-II/08 dated 6/2/2008 and 35/Commr/09 dated 19/10/09 passed by the Commissioner of Central Excise, Mumbai II Commissionerate. Since the issues involved in both these appeals were common, they were taken up together for consideration.
The facts relevant to the case were as follows. The appellant, M/s. Hindustan Petroleum Corporation Ltd. (HPCL, in short) removed high speed diesel oil (HSD in short) to M/s Indian Oil Corporation Ltd. (IOCL) without payment of duty during October 2006 to June 2007 and July 2007 to October 2007 claiming the benefit of notification No. 64/95-CE dated 16-3-95 and the central excise duty involved in respect of these removals were Rs. 3,85,74,452/- and Rs. 4,05,34,500/- respectively. The said notification granted exemption to “goods supplied as stores for consumption on board a vessel of the Indian Navy or Coast Guard”. Investigation conducted revealed that HSD was sold by HPCL to IOCL on commercial sales basis and the appellant had not received any orders from the Indian Navy and it was IOCL who subsequently sold the same to Indian Navy. Therefore, the department was of the view that the appellant was not eligible for the benefit of duty exemption and accordingly issued two show-cause notices dated 25-9-2007 and 1-8-2008 proposing to deny the benefit of the exemption and recover duty thereon along with interest and to impose penalty on the appellant. The said notices were adjudicated vide the impugned orders and the duty demands were confirmed along with interest and a penalty of Rs. 5 lakhs and Rs. 10 lakhs was imposed on the appellant. Aggrieved of the same, the appellant is before Tribunal.

Appellant’s contentions:- The ld. Counsel for the appellant made the following submissions.
Prior to 6-9-2004, the appellant used to clear petroleum products to the warehouse of IOCL without payment of duty and from the warehouse of IOCL, the goods were cleared to the vessels of the Indian Navy or Coast Guard without payment of duty, since the warehousing provisions as they stood at the relevant time provided for such removals. However, with effect from 6-9-2004 when the warehousing facility was withdrawn, the refineries were required to discharge excise duty on petroleum products removed from the refineries. Therefore, problems arose in availing end-use exemptions. This was anticipated by the Government and the CBEC had issued a circular No. 796/29/2004 dated 4-9-2004 wherein the Board had sought suggestions and recommendations from the filed formations with regard to implementation of end-use exemptions. This was evident from para 4 of the said circular which reads as follows:-
“4. Certain products are allowed to be cleared without payment of duty to specified categories of end-users subject to the specified conditions. These exemptions continue to be in force. If such clearances to the end-users are affected directly from the refinery, no difficulty should arise in the implementation of such end-use exemptions. If any problem is noticed in the administration of end-use exemption, the same may be examined by the Chief Commissioner immediately and the details promptly reported to the Board with suitable suggestions and recommendations including any refund mechanism.”
From the above circular it was clear that it was not the intention of the Government to deny end use exemptions to refineries of petroleum products supplied on end-use basis and therefore, the denial of exemption to the appellant was not sustainable in law.
(2) The matter was once again examined by the CBEC in 2005 and the Board vide circular dated 4-1-2005 had further clarified as follows:-
“Following the withdrawal of warehousing facility, certain issues had been raised by field formations and the oil companies stating the difficulties being experienced. The issue had been examined by Board. The various issues and the decisions on these are being communicated as below:
I) Issue : The Oil Companies, due to logistical reasons, cannot supply the petroleum products under end-use based exemptions (including the supplies of petroleum products to vessels of Indian Navy or Coast Guard), directly to the actual users without routing the goods through the installations created under the previous arrangement. In some cases, the oil installation are dedicated for a particular end user through which supply of petroleum products takes place whereas in other cases, the oil installation may cater to more than one end-users. In such situations, at the time of removal from refinery, the refinery may not know as to which particular consignment under clearance will eventually be supplied under end-use based exemption.
Decision : In case at the time of removal of petroleum products, the refinery its unable to identify the consignment which would ultimately be received by an eligible end user, they can opt for Provisional Assessment indicating appropriate reasons before the Deputy/Assistant Commissioner. While applying for provisional assessment, the refinery may be required to undertake the following:
(i) The consignment reaching the prescribed end-user shall be deemed to be relatable to the earliest clearance under Provisional Assessment under an end-use based exemption.
(ii) The refinery shall supply the complete and relevant information latest within a fortnight of delivery of the goods to a prescribed end user.
(iii) The refinery shall be liable to discharge the duty on the quantity cleared from the refinery itself. Hence, there will be no question of any abatement with regard to any losses subsequent to removal from refinery. Accordingly, the duty shall be paid on any differential quantity between the quantity cleared and actually received by the eligible end user.
However, while allowing such procedure, the following aspects should be adequately taken care of:
(i) The quantities of Petroleum products for which such Provisional Assessment are applied should be reasonable and supported by some collateral evidence of the requirement of the end user and their decision to acquire the same from a particular oil company.
(ii) The instructions contained in the CBEC's Excise Manual for Provisional Assessment and for execution of Bond as applicable, should be followed.
(iii) The jurisdictional Commissioner shall closely monitor the Provisional Assessments are finalized within the time limit envisaged under Rule 7 of the Central Excise Rules, 2002.
(II) Issue: Oil companies had represented to say that Indian International airports normally cater to domestic as well as international flights and the supplies of ATF (Aviation Turbine Fuel) to foreign-going aircrafts cannot be made directly from the refinery. Further, they have reported difficulties in installing multiple storage tanks (separate for domestic and export clearances) at the site of the airport due to space constraints. Similar problem had also been reported for supply of Bunker Fuel (FO/LDO/HSD) to foreign-going vessels and coastal vessels.
Decision: In such cases, ATF cleared for export warehouse may be allowed to be stored in the intermediate storage tanks subject to condition that such intermediate storage tanks are used exclusively for storing export goods. The details of such intermediate storage tanks including their physical location in the concerned installation should be intimated to jurisdictional Central Excise officer. Accordingly, para 6.1 in Circular No. 581/18/2001-CX dated 29th June, 2001 issued for export warehousing was modified as below:
"6.1 receipt of goods will be governed by the procedure specified under Circular No. 579/16/2001-CX dated 29th June, 2001 issued under rule 20 with the modification that in case of Aviation Turbine Fuel intended for supply for foreign going aircrafts and other petroleum products i.e. FO/LDO/HSD intended for supply as Bunker Fuel to foreign going vessels the goods may also be received through dedicated tanks in intermediate storage of goods cleared for export warehouse. For the removal of doubts, it is clarified that mixed bonding of duty paid goods with non-duty paid goods is not permitted at such intermediate storage installation."
Further, in view of difficulties in installing separate tanks at the airports, mixed storage of duty paid and non-duty paid goods at Aviation Fuel Station (AFS) at airports may be allowed subject to the condition that a tank-wise regular account shall be maintained about the receipt and discharge of duty paid and non-duty paid stocks of ATF. Accordingly, the following sub-para was added in para 6 of said circular.
"6.3 The Commissioner of Central Excise having jurisdiction over the warehouse may permit the registered person of the warehouse to store duty paid excisable goods or duty paid imported goods along with non duty paid excisable goods in the warehouse subject to conditions, procedure and manner of payment of duty prescribed by him"
It was hereby, made clear that no storage losses were permitted in the export warehouses/tanks whether intermediate or at AFS including those with such mixed storage. Further, the export warehousing under Notification No. 46/2001-CE (NT) dated 26.6.2001 does not cover removal of goods from one export warehouse to another. For Bunker Fuel supply, as long as the intermediate storage tanks were dedicated for supplied to foreign-going vessels, the same relaxation/procedure as stated above for ATF including those of mixed bonding for foreign-going aircrafts may be adopted.”
In the present case, even though the goods were supplied to IOCL, they were in turn supplied to the vessels of the Indian Navy for consumption as stores and IOCL had given a certificate to that effect vide certificate dated 19/8/09. Thus the end-use condition stipulated in notification 64/95-CE stands fulfilled and hence the benefit of the same cannot be denied to the appellant and in the light of the instructions cited supra, the appellant should be eligible for the benefit of exemption.
The ld. Counsel also relied on the decision of this Tribunal in the case of Indian Oil Corporation Ltd. vs. CCE, Rajkot 2008 (229) ELT 100] = (2008-TIOL-1132-CESTAT-Ahm) wherein IOCL was held eligible for refund of the excise duty paid by the refinery in respect of HSD/LSHS supplied to naval vessels though the supply was not made directly from the manufacturer to Indian Navy. The said decision was also concurred with by the Ministry of Law as evident from the letter dated 2-1-2009 of the Petroleum Secretary of the Govt. of India addressed to the Cabinet Secretariat while seeking permission of the Committee on Disputes to file appeal against the impugned orders. Reliance was placed in the decision of this Tribunal in the case of Garden Reach Shipbuilders & Engineers Ltd. [2010 (99) RLT ONLINE 261 (CESTAT-KOL)].
The ld. counsel also relied on a number of decisions of the hon'ble Bombay High Court at the interim stage (in WP Nos. 1477 of 2009 & 7478 of 2009) wherein the hon'ble High Court had directed the appellant to execute bond instead of cash deposit by PSUs while contesting duty liability.
It was also contended that notification NO. 64/95-CE was subsequently amended by notification 37/2007-CE dated 1-11-2007 which provided for grant of exemption to fuels procured by IOCL from any other manufacturer of the said fuels and supplied as stores for consumption on board a vessel of the Indian Navy or Coast Guard subject to certain conditions. These amendments were procedural in nature and they should be given retrospective effect. In the light of the above, it was pleaded that the appeals be allowed.

Respondent’s contentions:- The ld. Commissioner (AR) appearing for the Revenue strongly opposed the contentions raised by the appellant and submitted as follows:-
(a) It was an admitted position as evident from the statements of the Manager (Excise) and Chief Finance Manager of the appellant firm that Indian Navy had not placed any orders with HPCL for supply of goods as stores for ships under exemption and M/s HPCL had sold the goods to IOCL as a normal commercial transaction on a principal to principal basis. Therefore, the condition for availing the exemption that the goods should be supplied as stores for consumption on board the vessel of the Indian Navy was not satisfied.
(b) There were prescribed procedures for supply of stores on board the vessels of Indian Navy. As per the prescribed procedure, Indian Navy places an order on the supplier for supply of specified goods. In the case of petroleum products, the supplier was usually IOCL. IOCL thereafter procures the fuel from any of the refineries and when the goods were ready for supply, they apply to the Customs Preventive Department seeking permission to supply the same to the naval vessels. On receipt of such application, the Customs allows the supply under their supervisions. In the present case, there was nothing on record to show that the appellant had followed the prescribed procedure and therefore, the supply cannot be considered as supply of stores at all.
(c) Reliance was placed on the decision of the hon'ble Apex Court in the case of Leader Engineering Works[2007 (212) ELT 168 (SC)] = (2006-TIOL-138-SC-CX) wherein a similar issue arose. In that case the appellant therein supplied goods to the shipbuilder who in turn supplied the goods to Indian Navy. The question before the hon'ble court was whether benefit of duty exemption under notification 64/95-CE could be extended and the hon'ble court held that only goods supplied directly to the Indian Navy will qualify for the exemption. The ratio of the said decision would squarely apply to the facts of the present case and therefore, the appellant would not be eligible for the benefit of the said exemption.
(d) Reliance was also placed on the decision of this Tribunal in the case of Moosa Haji Patrawala Pvt. Ltd. wherein also the supply was effected to Voltas Ltd. who in turn supplied the goods to Indian navy and it was held that benefit of duty exemption under notification No. 70/77-CE (predecessor to notification 94/95) would not be available. The said decision was affirmed by the hon'ble Apex Court as reported in 2000 (119) ELT A82 (SC).
(e) As regards the reliance placed by the appellant on the circulars issued by the CBEC, the ld. AR submits that the appellant did not follow the procedure prescribed therein so as to be eligible for duty exemption. Accordingly he pleads that the impugned orders were sustainable in law and be upheld.

Reasoning of judgment:- We had carefully considered the rival submissions. During the period involved in these appeals, notification 64/95-CE which granted duty exemption, inter alia, to goods supplied as stores to naval vessels read as follows:-

S. No.	Description of goods	Conditions
3.	All goods other than cigarettes	If supplied as stores for Consumption on board a vessel of the Indian Navy

5.2 Subsequently, the said notification was amended vide Notification NO.37/2007-CE dt. 1-11-2007 which inserted another entry which read as follows:-

(1)	(2)	(3)
"3A.	Fuels Falling under Chapter Heading 2710.	If,- (a) manufactured and supplied by Indian Oil Corporation Limited as stores for consumption on board a vessel of the Indian Navy or Coast Guard; or (b) procured by Indian Oil Corporation Limited from any other manufacturer of the said fuels and supplied as stores for consumption on board a vessel of the Indian Navy or Coast Guard: Provided that (i) Indian Oil Corporation Limited obtains registration under rule 9 of the Central Excise Rules, 2002, with the Assistant Commissioner or Deputy Commissioner of Central Excise having jurisdiction over the concerned supply point; (ii) maintains records of receipt and supplies of these fuels; (iii) submits a monthly reconciliation statement to and proves to the satisfaction of the jurisdictional central excise officer that such fuels have been supplied as stores for consumption on board a vessel of Indian Navy or Coast Guard; and (iv) failing which Indian Oil Corporation Limited pays the excise duty leviable on fuels not properly accounted for along with interest."

Thus prior to 1-11-2007, to avail the benefit under notification No.64/95-CE, the condition required to be satisfied was that the goods should be supplied as stores for consumption on board a vessel of the Indian Navy. In the present case, it was an admitted position that the appellant did not receive any orders from Indian Navy for supply of fuels as stores for consumption. The appellant received orders from IOCL for supply of fuel and the goods were sold to IOCL as a commercial transaction on principal to principal basis. Both the Manager (Excise) and the Chief Accounts Manager had admitted the above position in their statements recorded under Section 14 of the Central Excise Act before the investigating officers. Thus on a plain reading of the notification, the appellant does not satisfy the condition stipulated in the notification. If the appellant's contention that they were eligible for the exemption in view of the Board's Circulars dated 4-9-2004 and 4-1-2005, then there was no need to amend the notification vide notification No. 37/07-CE dated 1-11-2007 by inserting a new entry. In fact the Board's circular relied upon by the appellant related to supply of petroleum products to the end users by routing the goods through installations which may cater to more than one user or utilizing the same intermediate storage facility for storing both duty paid and non-duty paid petroleum products. In either of these situations, the clarification pertained to supply of the petroleum products by the refinery. The said clarification did not pertain to a situation where the goods were supplied to another intermediating entity who in turn supplied goods to end user. Therefore, these clarifications do not help the cause of the appellant. The appellant's reliance on the interim orders passed by the hon'ble Bombay High Court was also of no avail as in these cases, the high court only directed the appellants therein to execute bonds in lieu of cash payment towards pre-deposit and the hon'ble High Court did not lay down any ratio precedent. It was also a well settled position that decisions rendered at the interim stage of stay were only prima facie views and they were not binding precedence.
The appellant had also placed reliance on a letter dated 2-1-2009 written by the Petroleum Secretary to the Cabinet Secretariat wherein the Ministry of Law had agreed with the view expressed by the Tribunal in the case of IOCL and had therefore, advised grant of permission by COD to agitate the matter before the Tribunal. The said letter was only an internal correspondence between two departments of the Government and cannot be considered as an aid to interpretation of statutes. In Doypack Systems (Pvt.) ltd. vs. UOI [1988 AIR 782 SC] = (2002-TIOL-389-SC-Misc), the hon'ble apex court laid down the principle that if the provisions of the statute were not ambiguous, notings in the files of the Government were not relevant, as the statute ahs to be interpreted in terms of the language used therein. Therefore, notings made in the files of the Government cannot be a basis for interpretation of a statutory exemption.
In the IOCL case (supra) relied upon by the appellant, the facts were that IOCL purchased duty paid HSD-LSHS from M/s Reliance Industries and supplied the same to naval ships of the Indian Navy. Since clearance of the goods to naval vessels were exempt from duty under notification 64/95, the appellant filed refund claims seeking refund of duty paid by Reliance the incidence of which had been borne by them (IOCL) which was rejected by the department. In appeal, the Tribunal held that IOCL would be eligible for refund even though the supply had not been made directly from the manufacturer to the Indian Navy by treating the same as a procedural omission. In the present case, the facts were different. It was not IOCL who was claiming the refund but HPCL who had supplied the goods to IOCL. HPCL was not the supplier of the goods to the Indian Navy but IOCL. Therefore, HPCL cannot acquire the status of supplier of stores to the Indian Navy which was the requirement of the notification. Further, the said decision cannot be said to be a binding precedent. Similarly the reliance placed in the Tribunal decision in the case of Garden Reach case also will not help as the facts of the said case were different and distinguishable from that involved in the present appeals, in as much as the supplier remained the same in the said case whereas in the present appeal the supplier of stores to the Indian Navy was IOCL and not the appellant.
In the Leader Engineering Works case, the hon'ble Apex Court dealt with a situation which was obtaining in the present appeals. M/s. Leader Engg. Works was a manufacturer of valves and cocks, sanitary bathroom fittings, etc. and supplied the said goods without payment of duty on the basis of supply/purchase orders by Mazgaon Docks Limited, Garden Reach shipbuilders and Goa Shipyard Ltd. as agent of Indian Navy and on behalf of Indian Navy and on the strength of certificates given by the Indian Naval Officers and claimed the benefit of notification 64/95-CE. The said benefit was denied by the adjudicating and appellate authorities and the matter reached the Apex court and the apex court held as follows:-
“8. Being aggrieved, the appellant filed the appeal before the Tribunal which had been dismissed by the Tribunal relying upon its earlier decision in Collector of Central Excise, Bombay vs. Moosa Haji Patrawala Pvt. Ltd. reported in 1999 (114) ELT 620 (Tribunal). It had been held by the Tribunal that the benefit under the notification was admissible only if the goods were supplied directly to the Indian Navy as stores for consumption on board a vessel of the Indian Navy and not through the ship builders on a certificate issued by the Indian Navy that the goods supplied by the appellant would be used for the manufacture of ships. That the said certificate would not be sufficient to extend the benefit of the notification as if the goods were supplied as stores for consumption on board of a vessel to the Indian Navy.”
The Tribunal agreed with the view taken by the Apex Court. The words of the exemption notification were clear and unambiguous. Goods other than cigarettes were exempted from duty if the same were supplied as stores for consumption on board a vessel of the Indian Navy, Government of India under the Ministry of Defence for manufacture of warship in yard. As per notification the goods supplied to the ship builders will not qualify for exemption and only the goods supplied to the Indian Navy directly will qualify for the exemption. Holding thus, the hon'ble Apex Court dismissed the appeal as devoid of merits. The ratio of the said decision applies squarely to the facts of the present case.
In the Moosa Haji Patrawala case also, while dealing with a similar situation, the Apex Court had held the same view in the context of notification No. 70/77-CE dated 7-5-77 which was also identically worded as notification 64/95-CE and which was the predecessor notification to 64/95. The finding of the hon'ble Apex Court was extracted verbatim below:- “The notification exempts goods from payment of excise duty which were supplied as stores for consumption on board vessel of Indian Navy. As per definition of stores under section 2 of the Customs Act, 1962, means goods for use in vessel or aircraft and include fuel and spare parts and other articles of the equipment whether or not for immediate fittings. In the present case, the Respondents had not supplied the goods for Indian Navy for subject to use as stores for consumption on board of a vessel. It was an admitted fact the goods in question was supplied to Voltas Ltd. and not to Indian Navy. As the goods had not been supplied by the Respondents to the Indian Navy to be used as stores for the consumption on board of a vessel we find force in the contention of the Revenue. Therefore, the Respondents were not entitled to the benefit of notification No. 70/77-CE in respect of ice cube making cabinets which were supplied to M/s Voltas. ……”
Thus in the light of the Apex Court decisions in the cases cited supra, the appellant will not be eligible for the benefit of notification No. 64/95-CE and we hold accordingly. Thus the confirmation of duty demand and interest thereon by the adjudicating authority had to be upheld unequivocally.
The last issue for consideration was whether the appellant was liable to penalty. Since the issue relates to interpretation of an exemption notification, we were of the considered view that imposition of penalty was not warranted. Accordingly we set aside the penalties imposed on the appellant in the impugned order.
But for the setting aside of the penalties, the impugned orders were upheld and the appeals dismissed as devoid of merits.

Decision:- Appeals were dismissed.

Comment:- The gist lies in the fact that the notification No. 64/95-CE dated 16-3-95 exempts only those goods from payment of excise duty which are supplied as stores for consumption on board vessel of Indian Navy. The benefit is not available for a commercial transaction on principal to principal basis. The supply of stores like fuel to intermediate who ultimately clears the said goods to Indian Navy would not be eligible for exemption to the person making supply to intermediate because exemption is for goods being directly supplied to the Indian Navy.

Prepared by: Ranu Dhoot

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