Intermixing SKO with HSD/MS does not attract differential excise duty absent manufacture.

Hindustan Petroleum Corporation Ltd. manufactured and cleared petroleum products, including High-Speed Diesel (HSD), Motor Spirit (MS) and Superior Kerosene Oil (SKO), from its Mahul refinery to various depots through pipelines.

Because the products were pumped sequentially without physical segregation, a transitional quantity known as “interface,” “transmix” or “intermix” arose between batches of SKO and HSD/MS.

The appellant treated the intermingled quantity as SKO and paid duty applicable to industrial SKO.

A show-cause notice demanded differential duty of ₹48,36,419 for February–March 2014, with interest and penalty, invoking the extended period of limitation.

The adjudicating authority confirmed the demand and imposed an equivalent penalty under Section 11AC of the Central Excise Act, 1944, read with Rule 25 of the Central Excise Rules, 2002.

The Commissioner (Appeals) upheld that order on 7 April 2016, leading to the present appeal before the Tribunal.

Whether the appellant was liable to pay Central Excise duty on the intermingled SKO/HSD/MS quantity at the higher duty applicable to HSD/MS or non-PDS SKO, rather than at the rate applicable to the SKO cleared by it?

Whether the intermixing of SKO with HSD/MS during pipeline transfer amounted to “manufacture” under Section 2(f) of the Central Excise Act, 1944, so as to attract the disputed duty?

Whether the Department could sustain the demand on the basis of the CBEC Circular dated 22 April 2002, in the absence of supporting statutory authority?

Section 2(f) of the Central Excise Act, 1944 defines “manufacture”; under clause (iii), processes such as packing, repacking, labelling or other treatment render goods “manufacture” only where the goods are specified in the Third Schedule.

The Tribunal relied on the principle that a departmental circular cannot create or alter substantive law and cannot prevail over the Central Excise Act or tariff provisions, as recognised in Sindur Micro Circuits Ltd. v. CCE, Atul Commodities Pvt. Ltd. v. CCE, Narendra Udeshi v. Union of India and DGFT v. Kanak Exports.

It also followed the Tribunal’s decision in Indian Oil Corporation Ltd. v. Commissioner of Central Excise & Service Tax, Guwahati, Final Order No. A/76445–76447/2019, which held that differential duty on interface SKO was unsustainable; that decision was affirmed by the Supreme Court on 14 September 2023 in Civil Appeal Nos. 4743–4745 of 2022.

The Tribunal further followed its earlier decisions in the appellant’s own cases concerning identical issues.

The Tribunal found that the intermixing occurred because of the technical necessity of sequential pipeline pumping and did not, by itself, result in the manufacture of a new excisable product.

The appellant had cleared SKO and paid the applicable duty, including duty at the industrial-SKO rate for the relevant intermix quantity; therefore, the Department could not revalue that quantity by applying the higher duty applicable to HSD/MS merely on the basis of an offsetting gain or loss.

The Tribunal held that the CBEC Circular relied upon by the Department had no statutory foundation for imposing duty at the rate applicable to another product and could not override the governing legislation.

Further, the products were not goods specified in the Third Schedule, and the show-cause notice had not specifically alleged that the pipeline intermixing activity amounted to manufacture.

Consequently, the adjudicating authority could not sustain the demand by travelling beyond the allegations in the notice.

In view of the Supreme Court’s affirmation of the identical ruling in Indian Oil Corporation Ltd. and the Tribunal’s earlier decisions in HPCL’s own cases, the issue was held to be no longer res integra.

It held that the Department could not demand Central Excise duty on the interface/intermingled quantity of SKO with HSD/MS at the higher rate applicable to HSD/MS or non-PDS SKO, and that the intermixing did not constitute manufacture in the circumstances of the case.

The impugned Order-in-Appeal dated 7 April 2016 was set aside, and the appeal was allowed in favour of the appellant, with consequential relief, if any.