No Differential Excise Duty Demand on SKO Intermixed with MS & HSD in Pipeline: CESTAT sets aside Order against HPCL [Read Order]

The Mumbai Bench of the Customs, Excise, Service Appellate Tribunal (CESTAT) recently set aside an impugned order passed by the Commissioner of Central Excise, demanding differential excise duty demand on Superior Kerosene Oil (SKO) intermix with Motor Spirit (MS) or High-Speed Diesel (HSD) at the rate of duty applicable with MS/HSD.

The Appellant, Hindustan Petroleum Corporation Limited is a manufacturer of Petroleum products and markets various finished products such as High-speed Diesel, Motor Spirit, Superior Kerosene Oil (SKO), Aviation Turbine Fuel (ATF), Lube Oil etc., These products are transported through the pipeline to their different depots situated at Vashi, Pakni, Lone and Hazarwadi through pipelines called Mumbai-Pune-Solapur pipeline (MPSPL) from where sales to retailers take place.

During the pipeline transportation only one product in the pipeline is pushed, and during the time of shifting from one product to another, the product may comprise a mixture of two products known as “interface” or “transmix”. These interface/transmix are collected into separate tanks as per safety and operational norms under Industry Quality Control Manual (ICQM).

The appellant used Superior Kerosene Oil as an interface between Motor Spirit and High-Speed Diesel during pipeline transportation. This was necessary because direct mixing of Motor Spirit and High-Speed Diesel would contaminate the entire product.

The Department observed that there was a gain in one product, such as MS/HSD, and a loss in another product, namely SKO, and therefore concluded that the quantities could be offset against each other.

The Department further decided that the duty liability should be determined based on the product in which the gain was recorded. It interpreted that, even though the duty payable on industrial SKO is higher than that applicable to SKO supplied under the Public Distribution System (PDS), any gain arising in MS/HSD due to intermix is liable to excise duty at the higher rates applicable to MS/HSD.

Mansi Patil, the appellate counsel, contended that the mixing of SKO with MS or HSD is technical necessity for transportation and such activity does not amount to manufacturing under section 2 (f) of the Central Excise Act, 1944.

The respondent Commissioner, represented by P.K. Acharya, contended before the Tribunal that the intermix of SKO were used for Industrial purposes during July 2014 to March 2015 and demands of differential Central Excise duty along with interest is sustainable.

S.K. Mohanty, Judicial Member and M.M. Parthiban, Technical Member relied on the decision of the Supreme Court of India in Commissioner of Central Excise and Service Tax vs Indian Oil Corporation Ltd. (2022). In that case, the Supreme Court upheld the order of the tribunal, which held that excise duty on the interface quantity of SKO cannot be demanded with rates applicable for HSD or MS and the appeal filed by the commissioner was dismissed.

The tribunal noted that all three products (MS, HSD, and SKO) are transported in the pipeline and SKO as interface gets mixed to either MS or HSD.

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