The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that intermixed Special Kerosene Oil ( SKO ) cleared with the intent for public distribution through the Public Distribution System ( PDS ) remains exempt from central excise duty.
Bharat Petroleum Corporation Ltd. (BPCL), the appellant, operates a refinery at Mahul, Mumbai, and transports petroleum products, including Special Kerosene Oil ( SKO ), High-Speed Diesel ( HSD ), and Motor Spirit (MS), through pipelines. SKO intended for sale via the public distribution system ( PDS ) is exempt from central excise duty under relevant notifications.
During transportation via the Mumbai-Manmad-Bijwasan pipeline, Special Kerosene Oil (SKO) inevitably intermixed with HSD and MS due to technical limitations. The revenue authorities issued three show-cause notices covering the periods from 2010 to 2017 demanding Rs. 154 crore in excise duty, penalties, and interest, alleging that the intermixed SKO lost its exemption status.
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The appellant argued that intermixing was a technical inevitability post-clearance, and no mala fide intent or diversion of SKO existed. The appellant argued that SKO was cleared for public distribution and relied on the Supreme Court ruling in the State of Haryana vs. Dalmia Dadri Cement Ltd., which interpreted “for use” as “intended for use,” supporting its claim for exemption.
The revenue argued that SKO must reach the Public Distribution System (PDS) to qualify for exemption and relied on the term “ultimate” in the exemption notification. The revenue also claimed the appellant had suppressed facts to evade duty justifying the invocation of the extended limitation period.
The two-member bench comprising Dr. Suvendu Kumar Pati (Judicial Member) and Anil G. Shakkarwar (Technical Member) observed that the intention at clearance determined exemption eligibility and that intermixing during pipeline transit was unavoidable and outside BPCL’s control. The tribunal observed the absence of evidence for SKO diversion or fraud.
Citing Dalmia Dadri Cement Ltd., the tribunal stated that legislative intent focused on the purpose of clearance, not subsequent technical phenomena. The tribunal ruled that extended limitation could not be invoked because the facts were already within the department’s knowledge.
The tribunal confirmed that intermixed SKO retains its exempt status when intended for public distribution. The tribunal set aside the demand orders and allowed the assessee’s appeal.
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