By TIOL News Service

MUMBAI, JAN 30, 2014: THE appellant removed high speed diesel oil (HSD) 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 grants exemption to "goods supplied as stores for consumption on board a vessel of the Indian Navy or Coast Guard".

Investigation 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 is not eligible for the benefit of duty exemption and accordingly issued two SCNs proposing to deny the benefit of the exemption and recover duty thereon along with interest and to impose penalty on the appellant.

The CCE, Mumbai-II confirmed the duty demands under two separate orders-in-original along with interest and a penalty of Rs.5 lakhs and Rs.10 lakhs was imposed on the appellant.

The appellant is before the CESTAT.

In the matter of the Stay applications filed in respect of both the orders, the CESTAT had vide separate orders directed the appellant to make a pre-deposit of Rs.1 Crore each and report compliance.

Incidentally, in the matter of Stay application filed against the O-in-O 07/Commr./MII/2008 Dated: 6.2.2008, the applicant had submitted that the Notification did not prescribe direct supply of stores to the Indian Navy and hence they are entitled for the exemption.

The Revenue representative, while opposing the application submitted that the benefit of exemption was not admissible to the appellant inasmuch as the goods were supplied to IOCL on a principal-to-principal basis and not directly supplied to the Indian Navy. Further, exemption was extended to indirect supplies only with effect from 1.11.2007 by Notification no. 37/2007-CE dated 1.11.2007 which inserted Entry 3A in the Table annexed to Notification 64/95-CE. However, the period of dispute in the present case is prior to this date, the representative for the Revenue added.

To this Revenue submission, the appellant claimed that the above amendment is to be treated as clarificatory in nature and hence retrospective in operation.

The CESTAT, however, was not impressed and noted -

"We are not able to accept this argument. It is trite law that an exemption Notification needs to be strictly construed. On this principle, we hold that the benefit of exemption under entry no.3 of the table annexed to Notification 64/95-CE can be extended only to direct supplies of stores to the Indian Navy for consumption on board their vessels and cannot be allowed to indirect supplies like those involved in the instant case. The benefit was extended to such indirect supply of ship stores for the first time on 1.11.2007."

We reported these Stay orders as 2009-TIOL-1575-CESTAT-MUM & 2010-TIOL-516-CESTAT-MUM.

The appeals were heard in October, 2013 and the orders were passed recently.

The Bench after hearing the submissions of both sides extracted the entries 3 & 3A to the notification 64/95-CE after its amendment by notification 37/2007-CE, dated 01/11/2007 and observed -

+ 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 is 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.

+ 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 are 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 has 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 is 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 - (2002-TIOL-389-SC-Misc), the hon'ble apex court laid down the principle that if the provisions of the statute are not ambiguous, notings in the files of the Government are not relevant, as the statute has 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.

The Bench referred to the apex court decisions in Leader Engineering Works vs. CCE 2006-TIOL-138-SC-CX, Moosa Haji Patrawala 2000(119) ELT A82(SC) and distinguished the case of IOCL vs. CCE 2008-TIOL-1132-CESTAT-Ahm cited by the applicant.

Holding that in the light of the cited Apex Court decisions the appellant will not be eligible for the benefit of notification No.64/95-CE, the confirmation of duty demand and interest thereon by the adjudicating authority was upheld unequivocally.

However, in the matter of penalty imposed, the Bench took a view that since the issue relates to interpretation of an exemption notification, imposition of penalty was not warranted and accordingly the same was set aside.

But for the setting aside of the penalties, the impugned orders were upheld by the CESTAT and the appeals were dismissed as devoid of merits.

In passing: Also see 2010-TIOL-79-HC-MUM-CESTAT.

(See 2014-TIOL-149-CESTAT-MUM)