Pranav B Prem

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai Bench, has set aside an excise duty demand of over ₹6.21 crore raised on Hindustan Petroleum Corporation Ltd. (HPCL), holding that the intermixing of Superior Kerosene Oil (SKO) with Motor Spirit (MS) or High-Speed Diesel (HSD) during pipeline transportation does not constitute manufacture under the Central Excise Act, 1944.

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The Division Bench comprising S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) observed that there is no statutory provision authorizing duty at different rates for the same excisable goods, and that Board circulars cannot create new liabilities beyond the law. The Tribunal noted that the intermixed product could not be classified as MS or HSD under Chapter 27 of the Central Excise Tariff Act unless it satisfied the Bureau of Indian Standards (BIS) specifications applicable to those products. Since HPCL had already paid excise duty treating the interface quantity as industrial SKO, the Bench held that no further liability could arise.

Background

HPCL’s Mahul refinery in Mumbai transports refined petroleum products such as MS, HSD, and SKO through a Mumbai–Pune–Solapur pipeline to various depots. During the continuous pumping of these products, a small portion of SKO unavoidably mixes with MS or HSD at product interfaces, creating what is termed as “interface” or “transmix.” The intermixed product is collected in separate tanks and handled in accordance with operational and safety protocols prescribed by the Oil Industry Safety Directorate. The Department, however, alleged that these intermixed quantities should be treated as MS or HSD and subjected to duty at higher rates. A show cause notice dated October 30, 2015, demanded ₹6.21 crore in excise duty — ₹1.72 crore on SKO mixed with MS and ₹4.48 crore on SKO mixed with HSD — while invoking the extended limitation period under Section 11A(4) of the Act and imposing an equivalent penalty under Section 11AC.

Arguments by HPCL

HPCL contended that the intermixing occurs unavoidably due to the technical nature of pipeline operations and does not amount to manufacture under Section 2(f) of the Central Excise Act. The company maintained that it had already paid duty on the intermixed quantities by classifying them as industrial SKO, which carried a higher duty rate than subsidized Public Distribution System (PDS) SKO. Hence, no differential duty could be demanded again.

The appellant also challenged the CBEC Circular dated April 22, 2002, which directed payment of excise duty on the higher of MS/HSD values, arguing that the circular contradicted Section 4 of the Act governing valuation. HPCL asserted that the circular cannot override statutory provisions or create a tax liability where none exists in law.

Department’s Stand

The Revenue relied on the same CBEC circular, arguing that once SKO mixed with MS/HSD, it effectively became MS or HSD due to its changed composition and was therefore liable to duty at higher rates. The Department also alleged that HPCL had undervalued its interface clearances by treating them as SKO and not as MS/HSD, leading to short payment of duty.

Tribunal’s Findings

After analyzing the technical reports, tariff provisions, and prior precedents, the Bench held that pipeline mixing of fuels does not result in a new, distinct product, and therefore does not constitute manufacture. The Tribunal noted that the intermixed product did not meet the BIS standards required for classification as MS or HSD. Consequently, it remained classified as industrial SKO, on which duty had already been discharged. “No statutory provision authorizes charging of duty at different rates for the same excisable goods. The Board’s circular can only clarify existing law and cannot impose a new levy or liability,” the Bench observed. It also emphasized that the extended limitation period under Section 11A(4) was wrongly invoked, as HPCL had disclosed all relevant details in its statutory returns and had no intent to evade duty.

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Concluding that the Commissioner’s order confirming additional duty and penalty was unsustainable, the Tribunal held:“The order to the extent it had confirmed additional duty over and above the amount of duty paid on industrial SKO, along with consequential penalties, is not legally sustainable.”  Accordingly, the CESTAT Mumbai set aside the excise duty and penalty imposed on HPCL and allowed the appeal in full.

Appearance

Ms. Mansi Patil, Advocate for the Appellants
Shri Shambhoo Nath, Special Counsel for the Respondent

Cause Title: Hindustan Petroleum Corporation Ltd. Versus Pr. Commissioner of CGST & Central Excise, Mumbai-II

Case No: Excise Appeal No. 85335 of 2016

Coram: S.K. Mohanty (Judicial Member), M.M. Parthiban (Technical Member)