By TIOL News Service

NEW DELHI, AUG 09, 2016: THE assessee imported 8435.816 metric tons of crude palm oil (industrial grade) valued at Rs.17,15,88,508/- and cleared the same on payment of customs duty of Rs. 3,47,95,453/- under Notification No. 21/2002-Cus dated 01.03.2002 read with Notification No. 66/2004-Cus dated 09.07.2004 during the period 12.09.2004 to 12.08.2005. As per the said notification, crude oil (non-edible oil) could be imported by paying customs duty @20% only when the said crude oil is to be used in the manufacture of soap or Industrial Fatty Acid. The assessee in the present case have been manufacturing refined edible oil out of the said crude oil. The assessee did not have facilities for saponification and fat splitting in their factory. The manufacturing process is one of distillation. As a result of this process, a product called "Palm Fatty Acid Distillate" emerges. The assessee after the processing of the imported 8435.816 metric tons of crude oil (non-edible grade) has manufactured 2219.895 metric tons of palm fatty acid distillate (industrial grade) i.e. approximately 25% and approximately 70% as refined palm oil.

The appellant/Revenue was of the view that the assessee was not entitled to the benefit of Notification No. 21/2002 read with Notification No. 66/2004. The Department, thus, issued show cause notice to the assessee demanding custom duty in the sum of Rs. 7,89,89,868/- under para 8 of Customs (Import of goods at concessional rate of duty for manufacture of excisable goods) Rules, 1996 as well as interest under Section 28AB of the Customs Act, 1962. In the show cause notice the Department also proposed imposition of penalty under Section 112/114A of the Act.

The case set up by the Department in the said show cause notice was two fold, i.e.

(i) the Palm Fatty Acid Distillate (PFAD) manufactured by the assessee was not Industrial Fatty Acid; and

(ii) even if Palm Fatty Acid was to be taken as Industrial Fatty Acid, the benefit of the aforesaid two notifications was not available to such a product as the assessee is using the same for the manufacture of refined edible oil and Vanaspati.

The Adjudicating Authority confirmed the demand raised in the show cause notice by holding that the assessee did not fulfill the conditions contained in the exemption notification.

The Tribunal held that as per HSN Explanatory Notes, the fatty acids distillate are also covered by the said chapter and, therefore, benefit of the notification was available to the assessee.

The Tribunal differed with the order of the Commissioner/Adjudicating Authority on the ground that when the notification stipulates that imported crude palm oil must be used for Industrial Fatty Acid, it does not mean that yield of Industrial Fatty Acid should be to the extent of 100% and even when it was to the extent of 25% that would suffice as the notification nowhere mentions any percentage yield of Industrial Fatty Acid.

The Tribunal has allowed the appeal of the assessee and set aside the order passed by the Commissioner.

The matter is before the Supreme Court:

At the outset, the Supreme Court remarked that the senior counsel appearing for the Revenue is right in his submission that present case is not a case for classification of goods but relates to the admissibility of exemption notification.

The Supreme Court observed,

When the question arises as to whether exemption from tax/duty of a particular notification is available to assessee or not, the same has to be examined in terms of the said notification i.e. whether the stipulations and conditions mentioned in the said notification are fulfilled by an assessee to claim the benefit of the notification.

Notification No. 21/2002 dated 01.03.2002, as amended by Notification No. 66/2004 dated 09.07.2004 is a general exemption notification which enlist number of products that are given full or partial exemption from payment of custom duty or additional duty. At Sr. No. 29 of this notification are edible oils falling under certain headings of Chapter 15. In contrast, goods mentioned at Sr. No. 30 (with which we are concerned) talks of non-edible goods having a Free Fatty Acid.

In order to qualify for exemption, the goods should meet the following criteria:

(i) First requirement is that such goods should be other than edible grade which means this entry exempts non-edible goods.

(ii) Second condition is that such goods should be having Free Fatty Acid 20% or more falling under chapter heading mentioned therein which includes 1511.

(iii) Such goods should be used for the manufacture of soaps, industrial fatty acids and fatty alcohol.

(iv) This entry further stipulates that it has to satisfy Condition No. 5 mentioned in Annexure to the said notification. Condition No. 5 reads as under:

"5. If the importer follows the procedure set out in the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996."

In the instant case, crude palm oil which was imported was used for making edible products like refined oil/Vanaspati. In the process of said manufacture, 25% of fatty (palm) was produced and 75% was oil which was edible. Thus, when the main manufacturing activity relates to edible product which is 75%, if in the process 25% of fatty (palm) emerges as a by-product it cannot be said that first requirement of exemption notification is satisfied in the instant case. Even if Industrial Fatty Acid is to be treated as separate manufacturing activity and it is non-edible, the same is only to the extent of 25%. That, would not satisfy the requirement of the exemption notification in question.

We are in agreement with the reasoning adopted by the Commissioner that HSN Explanatory Notes, in case where exemption notification was to be construed, would only serve as guide and is not used to interpret the same. Even here, we find that the HSN in question categorically mentions the product which are included by the said heading and specifically mentions 'fatty acid distillate'.

It, thus, categorically stipulates that Fatty Acid Distillate is characterised by high free fatty acid which cannot be 25%. So the by-product is rightly discarded by the Commissioner as not coming within the nomenclature of PFAD. Contrary reasons which are given by the Tribunal, thus, do not appeal to this Court.

Insofar as contention of the assessee that the impugned notification is time barred, it is difficult to accept the same in the facts of the present case. At the outset, we have to keep in mind Rule 8 of the Rules which does not prescribe any period of limitation. No doubt, in such an eventuality, as held by this Court in Bhatinda District Co-op Milk P. Union Ltd. the show cause notice has to be issued within a reasonable period. However, for this purpose, provisions of Section 28 cannot be resorted to to state that it has to be within a period of 6 months. The question has to be decided keeping in view the facts of each case and to examine whether the period in question is reasonable or not. In the instant case, we find that it is only through intelligence collected by DRI, Gandhidharn Regional Unit that it came to be revealed that the assessee had imported crude palm oil but it had no facility in manufacturing soap/Industrial Fatty Acid and was using the said imported crude palm oil for making edible products like refined oil/Vanaspati.

At the time of import, the importer only gives declaration. It is the actual use, which event takes place much after the import, from where it can be gathered as to where the import is made for the purpose for which it was done. As soon as the aforesaid information was gathered by DRI, show cause notice was issued. Therefore, we are of the opinion that show cause notice had been issued within a reasonable period and it cannot be treated as time barred.

For the foregoing reasons, we allow this appeal with cost thereby setting aside the order of the Tribunal and restoring the order passed by the Commissioner/Adjudicating Authority.

(See 2016-TIOL-118-SC-CUS)