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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3302 OF 2008

COMMISSIONER OF CENTRAL EXCISE,  AHMEDABAD

.....APPELLANT(S)

VERSUS

M/S GUJARAT AMBUJA EXPORTS  LIMITED

.....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

The  issue  involved  in  the  present  appeal  is  whether  the

respondent/assessee is entitled to avail the benefit of Notification

No.  21/2002-Cus  dated  01.03.2002  read  with  Notification  No.

66/2004-Cus  dated  09.07.2004  for  import  of  crude  palm  oil

(non-edible  grade)  which  is  not  used  in  the  manufacture  of

Industrial Fatty Acid whereas the assessee is using the same for

manufacturing the refined edible oil.   

2) This issue has arisen in the following factual background:  

The assessee is the manufacturer of refined edible oil, Vanaspati,

cotton yarn, starch, cattle feed, wheat floor etc.  It is registered

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with Kadi Division of the Central Excise.  From April, 2002, the

assessee engaged itself in refining of various edible oils.  During

the course of refining, it used to get Palm Fatty Acid Distillate as a

by-product  which  was  classified  under  Chapter  Heading  No.

38231900  and  cleared  it  duty  free  claiming  the  benefit  of

Notification No. 1175/75-CE dated 30.04.1975.  During the period

September,  2003  to  January,  2004,  the  assessee  imported

1990.031 metric tons of crude palm oil.  At that time crude palm

oil having Free Fatty Acid (FFA) 20 percent, or more was eligible

for concessional rate of duty under Notification No. 21/2002-Cus

dated  01.03.2002.   No  condition  was  attached  to  avail  that

exemption.   

3) We are  not  concerned  with  this  import  in  the  present  appeal.

Thereafter  on  16.01.2004,  Notification  No.  21/2002-Cus  dated

01.03.2002 was amended by Notification No. 20/2004-Cus dated

16.01.2004 wherein the words “for the manufacture of soap” were

inserted in the original notification.   

4) 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/- (@20%

basic + 2% education cess) under Notification No. 21/2002-Cus

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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.

5) Having regard to the aforesaid facts, 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

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for  manufacture  of  excisable  goods)  Rules,  1996  (hereinafter

referred to as the 'Rules') as well as interest under Section 28AB

of the Customs Act, 1962 (hereinafter referred to as the 'Act').  In

the show cause notice the Department also proposed imposition

of penalty under Section 112/114A of the Act.   

6) 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.   

7) In order to support the contention that PFAD was not Industrial

Fatty Acid, the Department relied upon the following material:

(i) The Department has relied upon the test report of the Chemical

Examiner,  Visakhapatnam  Dr.  T.A.  Sreenivasa  Rao,  which  is

reproduced below:

“Report : The sample is in the form of pale yellow soft solid

mass.  It is a by product of physical refining of palm oil.  It is Palm

Fatty Acid Distillate.”

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For  arriving  at  the  aforesaid  opinion,  Dr.  Rao  had  given

detailed  technical  report,  relying,  inter  alia,  upon  the  available

literature and the test conducted on the said product.   

(ii) A sample was also sent to Shri Narendra Kumar, Chemical  

Examiner, Customs House Laboratory, Kandla who has given his

test report as under:

“The sample is in the form of pale cream soft mass.  It has

the characteristics of palm fatty acid having FFA (as palmitic acid)

= 87.1% by wt & Acid value 190.87”

(iii) The Department also collected the evidence in the form of

statements from various customers of the assessee including M/s

Godrej  Industries  Ltd.  and  M/s  Aquagel  Chemicals  Pvt.  Ltd.

These customers had deposed that  the PFAD bought by them

from  M/s  GAEL  had  to  undergo  extensive  further  processing

before it was converted into fatty acid.  Shri Murali S. Mukerjee,

DGM,  M/s  Godrej  Industries  Ltd.  deposed that  Industrial  Fatty

Acids  were  used  in  soaps  and  industrial  surfactants,  personal

care and cosmetics, rubber and tyres, plastic, coating and links,

textiles auxiliaries, fabric care and lubricants and greases etc.  On

being asked about the process involved in converting Palm Fatty

Acid  Distillate  (PFAD) to  stearic  acid,  he stated that  firstly  the

Palm Fatty  Acid  Distillate  (PFAD)  was fed  to  oil  pre-treatment

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plant for improvement on clarity and for removal of sediments and

particles if  any;  the treated PFAD was then fed to  fat  splitting

plant;  in  fat  splitting  plant,  unconverted  glycerides  present  in

PFAD were converted into free fatty acids (crude fatty acid) and

glycerine at a designed pressure; in the second step, crude fatty

acid  was  hydrogenated  with  hydrogen  in  presence  of  nickel

catalyst; in hydrogenation reaction all the double and triple bonds

were  converted  into  single  bond;  the  hydrogen  required  for

hydrogenation  reaction  was  produced  by  steam  reforming  of

natural gas; after hydrogenation reaction catalyst was removed by

filtration in leaft type filter and colour was improved by bleaching

with the activated carbon and diatomite earth in a bleacher, finally

filtered and bleached hard fatty acid was homogenized and flaked

as  un-distilled  stearic  acid;  in  case  of  distilled  stearic  acid,

hydrogenated  fatty  acid  was  distilled  in  distillation  plant  and

distillate  produced  was  homogenized  and  flaked  as  distilled

stearic  acid;  PFAD  could  be  used  for  the  manufacturing  of

different types of fatty acid (stearic acid and fatty alcohol); PFAD

could also be used for the manufacture of soaps.

To the same effect was the statement of Shri Mallikarjun G.

Rane, Production Manager of M/s Aquagel Chemicals Pvt. Ltd.

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8) The assessee submitted its reply/defence, refuting the averments

made in the show cause notice.  It relied upon the following HSN

Explanatory Notes to argue that the product was in fact Industrial

Fatty Acid.   

“28.23 – INDUSTRIAL MONOCARBOXYLIC FATTY ACIDS; ACID

0 FROM REFINING; INDUSTRIAL FATTY ALCOHOLS.

Industrial  monocarboxylic  fatty  acids;  acid  oils  from

refining... 3823.19-Other....”

It  was also submitted that there was no allegation in the show

cause notice that the product PFAD is not covered by heading

28.23 of the HSN which lists Industrial Fatty Acids and, therefore,

PFAD had to be considered as Industrial Fatty Acids.  

9) The  Adjudicating  Authority  considered  the  aforesaid  respective

contentions  of  the  Revenue  as  well  as  the  assessee.   He,

however, brushed aside the contention of the assessee based on

HSN Explanatory Notes with the observations that though it was a

settled principle that in the matter of tariff classification, HSN is a

reliable guide and is generally to be followed but when it comes to

the application of a notification, the HSN is to be consulted only

for guides.  In the opinion of the Adjudicating Authority, since the

assessee was claiming the benefit of exemption notification it was

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to be examined as to whether assessee was covered by the said

Notification No. 20/2002.  According to him, in order to ascertain

the meaning of  the term “Industrial  Fatty Acid”,  the proper test

was  trade  parlance  and  the  normal  meaning  which  a

knowledgeable  person  would  attach  to  the  term  and  not

necessarily  what  is  laid  down  in  the  HSN.   Thereafter,  the

Adjudicating  Authority  discussed  the  statements  of  the

representatives of the two customers as mentioned above, on the

basis  of  which  it  was  concluded  that  in  technical  and  trade

parlance, it cannot be said that PFAD is the same as Palm Fatty

Acid and, therefore, it could not be called as an Industrial Fatty

Acid.   The  Adjudicating  Authority  further  held  that  this  was

supported  even  by  HSN  Explanatory  Notes  28.23  wherein  it

states  that  “Industrial  monocarboxylic  fatty  acids  are  generally

manufactured by the saponification or hydrolysis of natural fats or

oils”.   

10) Thereafter,  the  Adjudicating  Authority  discussed  the  second

aspect  raised  in  the  show  cause  notice  on  the  premise  and

presumption that PFAD is Industrial Fatty Acid.  On facts, it was

held that crude palm oil imported by the assessee was not used

for the manufacture of Industrial Fatty Acid, as the admitted fact

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was  that  as  a  result  of  the  manufacturing  process  of  the

assessee, approximately 75% of the product is refined edible oil

and  only  25%  is  PFAD  (by  quantity).   View  taken  by  the

Adjudicating Authority was that when the notification lays down

the condition that the crude palm oil must be used by Industrial

Fatty  Acid,  it  means that  its  use must  be  substantive  and not

nominal.  In other words, at least the crude palm oil should be

primarily used for the manufacture of Industrial Fatty Acid, which

was admittedly not the case.   

11) In  nutshell,  on  the  aforesaid  basis,  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.   

12) The  assessee  preferred  an  appeal  against  the  order  of  the

Adjudicating  Authority.   Said  appeal  has  been  decided  by  the

Custom Excise and Service Tax Appellate  Tribunal  (hereinafter

referred to as the 'Tribunal') vide impugned judgment.  A reading

of the judgment of the Tribunal would reflect that it has gone by

the  HSN  Explanatory  Notes  which  stipulates  that  Industrial

monocarboxylic fatty acids are 'generally' manufactured by the

saponification or hydrolysis of natural fats or oils.  Picking up the

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word  'generally'  from  the  said  language  in  HSN,  the  Tribunal

came  to  the  conclusion  that  process  of  saponification  or

hydrolysis  of  natural  fats  or  oils  may  be  a  process  generally

employed but that was not the 'only' process to obtain Industrial

Fatty Acid as the expression 'generally' cannot be equated with

'only' or 'specifically' or 'exclusively'.  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.   

Insofar as second issue raised by the Revenue in the show cause

notice is concerned, the Tribunal again 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.   

On the basis of the aforesaid reasoning, the Tribunal has allowed

the appeal of the assessee and set aside the order passed by the

Commissioner.   

13) Feeling aggrieved by that  order, present  appeal  is  filed by the

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Department.   Mr.  K.  Radhakrishna,  learned  senior  counsel

appearing  for  the  Department,  heavily  relied  upon  reasoning

adopted by the Commissioner on the basis of which it was held

that assessee was not entitled to the benefit of exemption.  Neat

submission  made  by  Mr.  Radhakrishna  was  that  there  was  a

patent  error  committed  by  the  Tribunal  in  relying  upon  HSN

Explanatory Notes, little realising that the matter did not pertain to

classification but exemption of a notification and in order to qualify

for  exemption from payment  of  the import  duty under  the said

notification,  the  focus  of  the  Tribunal  should  have  been  as  to

whether  the  assessee  has  fulfilled  the  conditions  of  the  said

notification.  He submitted that exemption notifications were to be

construed very strictly and in the instant case, the assessee has

failed to fulfill the conditions laid down in the notifications.   

14) Mr.  Lakshmikumaran,  learned  counsel  appearing  for  the

respondent/assessee,  on  the  other  hand,  submitted  that  the

reliance placed by the Tribunal on HSN Explanatory Notes was

perfectly  justified  and  stressed  upon  the  reasoning  that  was

adopted by the Tribunal in this behalf.  His further submission was

that there are various methods/processes that  may be used to

produce  Industrial  Fatty  Acids  like  hydrolysis,  saponification,

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vacuum distillation, splitting, etc.  Any of such processes may be

used by an importer intending to avail the benefit under Sr. No. 30

of Notification No. 21/2002-Cus.  The description for Sr. No. 30

during the relevant period did not specify any specific process to

be  followed by  the  importers,  which  implies  that  the  importers

were free to choose any of the different processes available.  In

this  regard,  amendment  made to  Notification  No.  21/2002-Cus

vide Notification No. 11/2006-Cus dated 01.03.2006 is important.

For the first time, an entry (S. No. 30(A)) was introduced which

also mentioned that the importer must have the facility for splitting

of oils.  He argued that it was, in a sense, built-in condition of the

process (splitting  of  oil)  that  must  be employed to  obtain  fatty

acids.  However,  even  then  clause  B  of  S.  No.  30  of  the

Notification continued to exist as such.  In other words, after the

amendment, the requirement of splitting of oils, does not exist in

Clause B,  which is  identical  to   Clause A prior  to  amendment

covering  the  respondents.   According  to  him,  the  2006

amendment makes it clear that prior to such amendment clause

(a)  of  Sr. No.  30 covered all  the process that  are possible for

manufacture of Industrial Fatty Acids.   

On the second issue, Mr. Lakshmikumaran again maintained the

stand of  the assessee which was taken  before  the  Authorities

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below, namely, it is not possible to obtain 100% PFAD by distilling

the  crude  palm  oil  (non-edible  grade)  and,  therefore,  due  to

technological  necessity, the assessee could  not  be  denied  the

benefit of exemption.  It was also submitted that merely because

the proportion of PFAD is 25%, would not mean that PFAD is a

by-product.   He  submitted  that  the  assessee  was  engaged  in

manufacture of PFAD and refined palm oil.  PFAD is sold to soap

manufacturers  and  refined  palm  oil  is  used  to  manufacture

Vanaspati.   

15) In addition, the learned counsel also submitted that in any case

the entire demand is time barred inasmuch as Rule 8 provides for

recovery of duty in cases where the goods imported are not used

for intended purpose.  He accepted that Rule 8 does not mention

any  specific  time  within  which  a  show  cause  notice  must  be

issued.  However, his submission was that this Court in the case

of  State of Punjab  v.  Bhatinda District Co-op Milk P. Union

Ltd.1 has  held  that  where  no  period  of  limitation  has  been

prescribed, statutory authority must exercise its jurisdiction within

a  reasonable  period.  Referring  to  Section  28  of  the  Act,  he

submitted that since that Section prescribes 6 months for cases

where there is no collusion or willful mis-statement or suppression

1 2007 (217) ELT 325 (SC)

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of  facts,  period  of  6  months  should  be  treated  as  reasonable

period of limitation.  On that basis, the show cause notice which

was  issued  on  24.03.2006  for  the  period  12.09.2004  to

12.08.2005 was time barred, submitted the learned counsel.

16) We  have  considered  the  respective  submissions  of  learned

counsel for the parties.

17) At  the outset,  we would like to remark that  the learned 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.   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.

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30  (with  which  we  are  concerned)  talks  of  non-edible  goods

having a Free Fatty Acid.  The precise description of the goods

which qualify for exemption from payment of custom duty is as

under:

“(A)  [All  goods],  other  than  edible  grade,  having Free  Fatty  Acid  (FFA)  20  per  cent  or  more  and falling  under  heading  1507,  1508,  1509,  1510, 1511,  1512,  1513,  1514  or  1515,  for  the manufacture  of  [soaps,  industrial  fatty  acids  and fatty alcohol].

(B)   [All  goods],  other  than edible  grade,  having Free  Fatty  Acid  (FFA)  20  per  cent  or  more  and falling  under  heading  1507,  1508,  1509,  1510, 1511, 1512, 1513, 1514 or 1515.”

18) 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:

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“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.”

19) 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, according to us, would not satisfy

the requirement of the exemption notification in question.

20) 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' as under:

“Fatty  acid  distillate,  obtained  from  fats  and  oils

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which have been subjected to vacuum distillation in the presence of steam as part of a refining process. Fatty acid distillate is characterised by a high free fatty acid (ffa) content.”

21) 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.

In this view of the matter, reliance on subsequent notification of

2006 is of no relevance.   

22) 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. (supra), 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

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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 whether 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.   

23) 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.

.............................................J. (A.K. SIKRI)

.............................................J. (N.V. RAMANA)

NEW DELHI; AUGUST  08, 2016.

Civil Appeal No. 3302 of 2008 Page 18 of 18