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Indian Oil Corporation (Assam Oil Vs. Collector of Central Excise - Court Judgment

LegalCrystal Citation
CourtCustoms Excise and Service Tax Appellate Tribunal CESTAT Delhi
Decided On
Reported in(1984)(15)ELT456TriDel
AppellantIndian Oil Corporation (Assam Oil
RespondentCollector of Central Excise
Excerpt:
.....1975 to may, 1977 as the central excise authorities said that the condensate was used as a motor spirit and, therefore, should pay central excise duty under item 6 of the central excise tariff. the appellate collector held that considering all the characteristics of the condensate, its source and its behaviour, it satisfies the definition of motor spirit in all respects and, therefore, the assessment and demand of duty was correct.3. it is necessary to state briefly the manner in which the condensate is obtained. the crude oil which is lifted from the well goes into a separator which separates the crude oil from the associated gas. in the separator the crude oil is separated from the lighter hydrocarbon, in this case the natural gas. the crude oil drops to the bottom and the.....
Judgment:
1. This is an appeal dated 26-12-79 against Order-in-Appeal No.122/ASM-1979 dated 3rd September, 1979 passed by the Appellate Collector of Central Excise, Calcutta, and sent with letter dated 8th January, 1980.

2. The dispute is about the use of casing head condensate (CHC) by the Assam Oil Company, Digboi which led to a demand of duty for the period February, 1975 to May, 1977 as the Central Excise authorities said that the condensate was used as a motor spirit and, therefore, should pay Central Excise duty under item 6 of the Central Excise Tariff. The Appellate Collector held that considering all the characteristics of the condensate, its source and its behaviour, it satisfies the definition of motor spirit in all respects and, therefore, the assessment and demand of duty was correct.

3. It is necessary to state briefly the manner in which the condensate is obtained. The crude oil which is lifted from the well goes into a separator which separates the crude oil from the associated gas. In the separator the crude oil is separated from the lighter hydrocarbon, in this case the natural gas. The crude oil drops to the bottom and the lighter gas ascends to the top. The gas is taken from the separator into a compressor in which a part of the gas gets liquified. The compressed gas is then passed through the condensate trap where the liquid portion drops to the bottom while the gas goes out from the top.

The liquid portion is collected in a condensate tank and then moves out to the crude oil tank from which both are taken for refining. Part of the liquid condensate, however, is taken and used in tractors of the Company at well heads to drive winches for cleaning the pipes through which the oil is pumped out of the well.

4. During the hearing, the learned counsel for the appellant-Assam Oil Co., said that the gas was mainly a compound of propane/ butane/ methane. It was argued by the appellant that the condensate was not goods and there had been no manufacture of a product conforming to the definition of more spirit, the product is neither sold nor is capable of being sold in the market. It does not meet Indian Standards specifications relating to motor spirit. The excise duty was sought to be levied under tariff item 6(1) but in reality it does not fall within that item as it is not suitable for use as a fuel in internal combustion engines. The use of the goods in the tractor winches has had corrosive effect. The condensate is not a mineral oil. It is not a liquid hydrocarbon but a gaseous hydrocarbon and becomes a gas at normal temperature and pressure. But if it is to be called a mineral oil then it is a crude oil and in fact comes out of the well together with the crude oil. The CHC obtained from the condensed gas cannot be regarded as a mineral oil; on the other hand since it is more easily identified as a crude mineral oil, it is not excisable at all.

5. Simply because the oil has a flashing point below 76* F it is not classifiable under tariff item 6. It should also be by itself or in admixture with any other substances, be suitable for use as a fuel for internal combustion engines. There has been no finding that it is so suitable. The condensate either by itself or in admixture with any other substance is not suitable for use as a fuel for internal combustion engine. It does not fulfil Indian Standards specifications of motor spirit and as its Reid Vapour Pressure is very high it will give rise to 'vapour lock'. The research octane number of the CHC is only 73 which is too low a number because motor spirit requires at least a value of 83. Such a low octane number would produce continuous knocking in the engine. The CHC has high corrosive effect and this will immediately damage the engine. Elemental sulphur content in motor spirit has to be removed whereas the CHC contains high amounts of sulphur. In motor spirit, tetra ethyl of lead is added to modify the octane number to a favourable value. The CHC has received no addition of any chemical. Casing head gasoline is not the same thing as casing head condensate. The reference made by the lower authorities to "petroleum products" was irrelevant. All the above were argued before the Tribunal on 25-11-1983 by the I.O.C. representative, Mr. R.Venkataraman, Manager.

6. The learned counsel for the Department opposed the appeal by saying that it is clear that the casing head condensate had been used as motor spirit and that since it had a flash point below 76F, it was classifiable as a motor spirit under Central Excise Item 6. The appellant had used this oil for two years and stopped only when the Central Excise demanded duty under item 6 of the tariff. It was not a crude oil because as explained by the Assam Oil Co. itself the condensate is obtained from gases which have been separated from the crude oil. There can be no doubt that it is a mineral oil because it is obtained as a mineral when it is brought up from the well together with the crude petroleum. They had used the oil without any damage to the engines for two years and had it not been by the Central Excise demanding duty, the use would have continued and there is no sign that they would have stopped this use because of any reason connected with the unsuitability of the oil. Motor spirit has been defined in item 6 of the Central Excise Tariff and, therefore, there is no need to look for any other definitions. The test report; showed that the oil had a flash point of below 76F and this had not been challenged at any time and, therefore, it remained valid and uncontroverted. That this was not a trial use as claimed was proved by the fact that it went on for two years. The sulphur content would make no difference because the law does not make any stipulation about such content in the item defined as motor spirit. The Appellate Collector has dealt with the matter in detail and it is easy to see from this that the appeal has no merits and deserves to be rejected.

7. The Appellants made certain references to a number of cases, for example, 1978 ELT J 121 to say that where there was no removal of the goods within the meaning of Rules 9 and 49 of the Rules the same were not excisable. It also referred to (1976)2 SCC 241 to say that the construction and name of the goods for the purpose of taxation the name commonly understood by the people should be the criterion for determining whether the goods fall within the particular category. It also referred to A.I.R. 1963 S.C. 791, A.I.R. 1968 S.C. 922, 1980 ELT 696 and 1980 ELT 343 to support its contention that there was no manufacture of the goods and the goods have no market. There was no removal of the goods and, therefore, the goods were not excisable. In support the appellant quotes 1981 TLR 2733, 1980 ELT 327 and 1978 ELT J 8. The main question to be decided, however, is not so much the law point as whether the condensate obtained by the condensation into liquid of natural gas obtained with crude petroleum from the well can be assessed under tariff item 6 as motor spirit. The tariff defines motor spirit as- "(i) any mineral oil (excluding crude mineral oil) which has its flashing point below seventy-six degrees of Fahrenheit's thermometer, and which, either by itself or in admixture with any other substance, is suitable for use as fuel for internal combustion engines; and (ii) power alcohol, that is to say, ethyl alcohol, of any grade (including such alcohol when denatured or otherwise treated) which, either by itself or in admixture with any other substance, is suitable for being used as aforesaid.

Explanation I-'Mineral oil' means an oil consisting of a single liquid hydrocarbon or a liquid mixture of hydrocarbons (except for associated impurities) derived from petroleum, coal, shale, peat or any other bituminous substance and includes similar oil produced by synthesis or otherwise.

Explanation II-'Flash point' shall be determined in accordance with the test specified in this behalf in the rules made under the Petroleum Act, 1934 (30 of 1934)." The test by the Chemical Examiner found the oil had a flash point of below 76F which is a flash point specified for motor spirit. In the item, the motor spirit must also be a mineral oil. The liquid condensate obtained by the Assam Oil Co. fits the explanation because it is a liquid mixture of hydrocarbon and was derived from petroleum.

The learned counsel for the appellant tried to argue that since it came out with the crude oil it is a crude mineral oil which is excluded by the item notes from assessment as motor spirit. This argument has a serious weakness because, as we have seen, the condensate is not used in the form it is obtained. Crude mineral oil must be understood to be a mineral oil which needs to be refined or treated before it is put to the uses for which it is suitable. The condensate after compression into liquid was used in driving internal combustion engines and the operation went on for two years. In the form it was used, the condensate was no longer in the same form in which it came out of the well; the gas had been compressed and cooled sufficiently to turn into a liquid, in which form it was fed into the engines to drive them. We are not informed that the liquid condensate underwent any further refining to remove it from the crude stage. This is sufficient to convince any one that it was not crude. And no one can seriously doubt that it was a mineral oil, having been obtained the way it was.

9. During the arguments the learned counsel for the appellant was asked whether the engines in which the condensate was used to drive were internal combustion engines and he affirmed that they were. The principle of an internal combustion engine, as the name implies, is that the motive power is provided by the combustion of the fuel inside the engine in cylinders. This combustion leads to rapid expansion of the burnt fuel which in turn pushes a cylinder to push a shaft called a crankshaft which turns a wheel. The principle of all internal combustion engines, with slight variations in mechanical details, are always the same. There are also engines, such as steam locomotives, whose motive power is supplied by a source outside the engine. It was argued by the learned counsel for the appellant that the condensate was not suitable either by itself or in admixture with any other substance for use in internal combustion engines. It does appear that there was no admixture with any other substance; but if the product was used by itself, it is sufficient to qualify. If anything, this testifies to its sufficiency for use in internal combustion engine as a fuel. We are unable to understand why Assam Oil Co. says that the condensate is not so suitable in spite of having used it for two years in their engines.

They talk about the condensate not having the requisite anti-knocking rate or that it has a low octane number or that it has a high sulphur content which corrodes or damages its engine parts. We are mystified by these arguments : if octane value of the fuel is so wrong, serious damage to the engines would have taken place and it does not take two years for the damage to be caused; 10 to 15 days are enough. As for the corrosion, there is no evidence that the sulphur content was so high, as claimed. In general, natural gas has a low sulphur content and there is no evidence that the engine suffered from serious corrosion due to the sulphur contents of the condensate. If corrosion was caused it would have been apparent in the two years or so that the condensate was used.

10. We have given sufficient attention to all the authorities quoted by the Assam Oil Co. to argue that the condensate was not goods or that since it was not removed it would not be excisable or that it was not marketable or was not understood to be marketable goods and all other rulings. But the quotations are largely irrelevant. For one thing it must be remembered that rules 9 and 49 were amended in 1982 so as to make goods liable to duty even if they are not removed. These amendments took retrospective effect from 1944 and are deemed to have been co-eval with the Central Excise Rules. The Assam Oil Co. claimed that the goods are not marketable and they are not known as motor spirit. They overlook the fact that the goods were not marketable simply because they did not market them but used it themselves. This is not the same thing as not being marketable. The fact that it was marketable is proved by its utility for the purpose to which it was put. The fact that condensate did not have specifications of motor spirit under Indian Standards specifications will not make it less a motor spirit assessable under item 6; we cannot go by Indian Standards for determining assessability of the Central Excise except for very limited purposes as where there is doubt whether a product or an article is what it is claimed to be or whether it is of the quality that Indian Standards has laid down standards for. It is for this reason that this Institution has a scheme for stamping goods placed on the market, as a guarantee that the product stamped conforms to specifications laid down by it, for the safety or satisfaction of customers. It does not mean that the goods not so stamped are not goods of the same generic description. Indeed, there are goods that bear no Indian Standards marks. But whether stamped or not, all the goods are equally liable to Central Excise levy.

11. There appears to be more than a grain of truth in the charge that Assam Oil Co. stopped using this condensate in its engines only when the Central Excise came round to investigate and when the demand for duty was issued. There is good reason for thinking that but for this demand, the Assam Oil Co. would have continued to use the condensate in their tractor engines. We, therefore, are of the opinion that from all points of view, both legal as well as technological, the assessment of the condensate as motor spirit was correct and should not be interfered. We accordingly reject the appeal.


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