ORDER
Gowri Shankar, Member (Technical)
1. We are required in this appeal to determine at what stage in the various processes that it undergoes the crude oil that the appellant mines in its wells in Gujarat becomes crude oil as defined in Section 2(e) of the Oil Industries (Development) Act, 1974, on which cess as specified in Section 15 of the Act is liable to be paid.
2. The facts which are not in dispute are these. The appellant pumps the crude oil from various well that it operates situated in south and north Gujarat. The oil is pumped through pipelines to group gathering stations. We are told that there is a group gathering stations. We are told that there is a group gathering station in the vicinity of very field. The oil, is stored in these stations for a day or so, during which period sediment of some part of water which form part along with oil settled to the bottom and is drained off. There are however still contents of water to some extent. This oil is taken through pipelines to a central tank farm present at each filed. There once again the water and sediment that settle in the bottom are removed. The oil is thereafter pumped through pipelines to the tanks in the precincts of the refinery of Indian Oil Corporation in Koyali in Vadodara. Here, before the oil enters the distillation column in which it is subjected to process of refining and impurities removed once again water is allowed to settle. Thereafter it is heated during which it loses a further quantity of moisture. It is stated that by these means all the water in the oil which can be removed otherwise than through refining is removed the remaining water can only be removed during the process of fraction at distillation.
3. Crude oil is liable to pay cess in terms of Section 15 of the Oil Industries (Development) Act, 1974 (hereafter referred to as “the Act”.) Sub-section (1) of Section 15 of the Act provides for levy of duty of excise on crude oil. Sub-section (2) with which we are concerned is reproduced as follows:
“Every duty of excise leviable under Sub-section (1) on any item shall be payable by the person by whom such item is produced, and in the case of crude oil, the duty of excise shall be collected on the quantity received in a refinery.”
4. It is also necessary to reproduce the definition of “crude oil” contained in Clause (c) of Section 2 of the Act as meaning:
“petroleum in its natural state before it is refined or otherwise treated but from which water and foreign substances have been extracted.”
5. In the order impugned in this appeal, the Commissioner has said that the quantity of crude oil which the appellant sent to the refinery of indian Oil Corporation at Koyali i.e. the quantity before any water has been removed in that refinery in that refinery by either of the two processes that we have referred to, is the crude oil on which duty is to be levied at Rs. 900/- per ton. She says that this is the quantity that is received in the refinery and hence the quantity referred to in Sub-section (2) of Section 15 of the Act.
6. It is the appellant’s contention that the crude oil which Sub-section (2) of Section 15 refers to as received in a refinery must necessarily be the crude oil as defined in Clause 4(e) of Section 2 of the Act. That oil must be the oil from which sediment and water has been extracted by processes other than refining. It is stated that the processes of sediment in the tank and evaporation of water by heating are not processes essential to, or part of fraction distillation of crude oil in a refinery and it is only for sake of convenience that these activities are undertaken in the refinery. The oil needs to be refined in any case is to be stored in the tank at the refinery an advantage has taken up of this act, as also utilising in the heat exchange that is generated during the process of distillation of the oil. This was in fact the practice that was followed and reliance is placed upon the trade notice no 140/CX-27/8-CE-Cal 11/88 dated 16.6.1988.
7. The department representative emphasises the finding of the Commissioner in this regard.
8. The contention was raised before her that, by applying the definition contained in Clause (e) of Section 2 of the Act, the water that is extracted before crude oil enter the refinery for refining process cannot be considered to be part of the crude oil for purpose of levy of cess. The Commissioner has said that at group gathering station and central tank farms of the appellant, the crude oil is allowed to stand and chemically treated so as to extract base sediments and water (BSIW). Despite extraction of some BS & W, some amount of BS & W continues to remain present in the crude. She says that ONGC in the course of personal hearing have stated that it is not possible to extract this remnant BS & W without subjecting the crude to refining. She further finds that Section 2(e) lays down three criteria to determine whether the oil is crude oil (i) It must represent petroleum in its natural state; (ii) the stage at which cess is to be levied must be the stage before the crude is subjected to refining or any other treatment; and (iii) the crude must be that from which water and foreign substances have been extracted but before it is refined or otherwise treated.
9. While analysing the ingredients of Section 2(e), the Commissioner has made an error in concluding that the stage at which cess is to be levied must be the stage before the crude is subjected to refining or any other treatment. This is not how we perceive the Section 2(e) of the Act. It does refer to petroleum in its natural state which is otherwise treated. But, in our view, this treatment will not include the treatment to which it is subjected for the purpose of removal of water and foreign substances. Any other interpretation would result in ignoring the later part of the definition.
10. In the light of the Commissioner’s finding reproduced above with regard to the statement stated to have been made by the appellant before her at the hearing, we had asked for an affidavit to be filed by one of its senior employee indicating the actual position. The affidavit affirmed by C.M. Jha, Superintending Engineer (Production) of the appellant confirms what we have reproduced earlier that the moisture and sediment in the crude which is mined partly removed when it is subjected to processes of settlement and heat treatment before having sent to the central tank farm. A further quantity of water is allowed to settle then and is drained and thereafter the crude is sent to refinery, there after water is drained, it is subjected to heat treatment. In the meantime, samples of the emulsion of water are subjected to test involving distillation in order to determine the net quantity of water present to ascertain the quanti of crude oil. It is the net crude for which payment is made. It is only on this quantity of crude that the appellant needs to pay to Indian Oil Corporation.
11. It will be thus apparent in coming to her conclusion, the Commissioner has demanded duty on the quantity of water that is drained in setting tank, and the quantity of water that is lost by heat treatment at the refinery subsequent to the stage. There is no logical reason as to why the first step should be ignored. After all, even prior to this stage, there has been removal of water by this identical method at two earlier points. Further, the heat treatment for removal of water to which the oil is subjected by the Indian Oil Corporation should also not be excluded. If, as is contended, the heat treatment of the crude oil at this stage is only to remove water, and not a process which is required for its refinery, it is clearly a treatment to remove water, and the emulsion emerging from it, this process will not be crude oil as defined in Section 2(e).
12. We note however that the affidavit of Jha was not before the Commissioner, who, as we have said earlier, proceeded on what she states to be an admission by the appellant, that after the settlement in the last tank, no water is removed except the refinery. We are of the view that the Commissioner should consider this aspect and other material that either side may produce on this aspect and thereafter come to a conclusion keeping in mind the views we have expressed.
13. The show cause notice demanding duty for the period 1.4.1994 to 31.1.1999 is dated 24.3.1999 and invoked the extended period by alleging that the appellant had suppressed the correct quantity of oil that was received from the refinery. The appellant had contended before the Commissioner that there was no such suppression and that it was all along under the impression that it as the net quantity of oil that is not including the water and sediment, emulsion contained in the oil which was liable to cess. It relied upon the trade notice of the Calcutta Commissionerate and the correspondence exchanged by the audit department and the Commissioner of Central Excise, Vadodara in support.
14. The trade notice communicates to the assessee the procedure for assessment in payment of cess of the crude oil has been prescribed and lays down the procedures to be followed with regard to despatch of crude oil, its receipt, destination and payment of duty. Paragraph 2 of the trade notice reads as follows:
“(ii) Immediately on receipt of the information relating to the actual quantity of net crude oil received by the refinery of factory; determined after test results; the oil producing company shall debit the amount of cess in the PLA kept for the purpose separately for each refinery. Details of laboratory tests on crude oil samples in form B (enclosed) and a crude oil delivery statement in form C (enclosed) shall also be furnished to the assessing officer for his verification and record.
(iii) Within 20 days after the close of each month the producer (oil producing company) shall file with the proper form enclosed) showing separately for each refinery or factory the quantity of crude oil produced, the quantity despatched and received at the refinery or factory, the particulars of delivery tickets under which such quantity was removed and amount of cess paid during the month together with original and duplicate copies of P.L.A., receipted treasury challans on which deposits in the account current were made by payment into the Government Treasury and delivery tickets.”
15. The form B which deals with the laboratory tests on crude oil samples and form C deals with crude oil delivery statement. Both have columns for water content of the average sample. Form B has column for water quantity by the D & C method. This is to be signed by the chemist in charge of the laboratory and the representative of the oil producing company. Form C – crude oil delivery statement also provides for intimation of the gross measured volume free water from tank calibration, net measured volume of wet oil, volume and weight of suspended water, net weight of crude oil and net volume of dry crude delivered 15(SIC)C.
16. These references to the net volume and the presence of moisture in this indicates to us that in determining the crude oil which is subjected to cess quantity of water is present is not to be included. Where it is not so, thee is no reason why weight of water to be included at all. If the assessments were to be made of the crude oil including in its water, there would be no requirement for the test report and the subsequent calculation of the water quantum to be communicated to the department. It is contended on the basis of these documents, the appellant was under the impression that the department contemplated recovery of cess only on the net volume of the crude excluding water.
17. This point again has been raised for the first time. The appellant had relied upon these documents in support of its claim that from the data contained in form B and when the jurisdictional officers would have been aware that the quantity of crude oil of which duty was paid was not of water and sedimentation. The Commissioner has not accepted this plea on the ground that this test report was not submitted either the appellant or the Indian Oil Corporation for which purpose he relies upon the letter dated 29.5.2000 of the Jurisdictional Superintendent. This letter was written after hearing was concluded and therefore did not have an opportunity to rebut its contents. Counsel for the appellant now says that he will be able to do so. He also points out that the letter and the circular give rise to a belief in the mind of the appellant that duty was not required to be paid on water contained of the oil. In the light of this submission, the question of limitation will also have to be gone into.
18. The appeal is therefore allowed, the impugned order set aside and the matter remanded to the Commissioner. The Commissioner shall decide the matter afresh in the light of our observations, after giving an opportunity to the appellant of being heard.