Wednesday, September 21, 2016



                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 3302 OF 2008


                               J U D G M E N T


                 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.

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 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.

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.

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 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.

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  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.

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.

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.”
                 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
            “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 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.

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.
                 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.

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 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”.

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 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.

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.

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  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

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

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,  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 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.

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 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.

We have considered the respective submissions of  learned  counsel  for  the

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. 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.”

In order to qualify for exemption,  the  goods  should  meet  the  following
(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
(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
“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,  according  to  us,
would  not  satisfy  the  requirement  of  the  exemption  notification   in

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  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.”

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.

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  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

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.

                                                                (A.K. SIKRI)

                                                               (N.V. RAMANA)

AUGUST  08, 2016.
[1]   2007 (217) ELT 325 (SC)

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