The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a Customs order that treated imported Naphtha as Natural Gasoline Liquid (NGL), holding that the department failed to discharge its burden of proving the proposed reclassification through reliable scientific evidence.
The bench of Somesh Arora (Judicial Member) and A.K. Jyotishi (Technical Member ) observed that when test reports conflict, greater weight may be given to reports issued by specialised agencies that examine a wider range of relevant parameters. It found that the reports of the Indian Institute of Petroleum (IIP), Dehradun, and Geo-Chem Laboratories, which identified the product as Naphtha, were more detailed than the reports relied upon by the Customs Department.
The dispute concerned approximately 20,110.767 metric tonnes of petroleum cargo imported by the assessee from Oman and declared as Naphtha under Customs Tariff Heading 2710 1229.
The appellant/assessee had entered into an agreement with Aureole Trading LLC, UAE, for procuring the cargo. The goods were transported through the vessel MT Tuna and arrived at Kandla Port in February 2021. Seven Bills of Entry were filed for warehousing the imported material.
Samples drawn by Customs were initially tested at the Customs Revenue Control Laboratory (CRCL), Kandla. Although the first report did not expressly identify the material as either Naphtha or NGL, the laboratory later clarified that the sample was Natural Gasoline Liquid.
A test conducted by TUV India Private Limited at Hazel Mercantile’s request, however, identified the imported product as Naphtha. The importer sought retesting and permission to re-export the cargo, stating that the goods had always been intended for export to an overseas purchaser.
The Directorate of Revenue Intelligence subsequently searched the company’s premises and seized the imported goods. The seizure was based primarily on the allegation that the product had been misdeclared as Naphtha instead of NGL, which Customs considered classifiable under CTH 2710 1290.
The assessee approached the Gujarat High Court, which permitted the cargo samples to be retested. Samples were thereafter examined by different laboratories, resulting in conflicting conclusions. CRCL, New Delhi, identified the product as NGL, while Geo-Chem Laboratories and IIP, Dehradun, concluded that it was Naphtha or light Naphtha.
After several rounds of litigation concerning the provisional release of the cargo, the goods were ultimately permitted to be re-exported. The assessee initially furnished a bank guarantee of ₹15 crore, which was subsequently reduced to ₹8 crore by the Gujarat High Court.
The department later issued a show cause notice proposing to reject the declared classification and value of the goods. The notice proposed to increase the assessable value from approximately ₹79.64 crore to around ₹278.95 crore, confiscate the goods and impose penalties under Sections 112, 114AA and 117 of the Customs Act, 1962.
The Commissioner of Customs, Kandla, concluded that the goods were NGL and had been misdeclared as Naphtha. The adjudicating authority also held that NGL was a restricted product and that its import did not comply with the applicable Foreign Trade Policy and petroleum laws. The goods were consequently held liable to confiscation.
Before the CESTAT, the assessee argued that the department’s laboratories had not tested the parameters specified under the relevant Bureau of Indian Standards specification for Naphtha. It contended that Geo-Chem and IIP had conducted substantially more detailed examinations and had expressly identified the product as Naphtha.
The company further maintained that even if the product was assumed to be NGL, NGL was merely a species of the broader genus “Naphtha”. It relied upon the Tribunal’s ruling in the Reliance Industries case, in which NGL was held to be covered within the generic description of Naphtha.
The Revenue argued that the product’s high concentration of C5 and C6 hydrocarbons made it chemically closer to NGL. It also relied upon digital evidence, including WhatsApp conversations and allegedly recovered shipping documents, to contend that the cargo had originated in Iraq rather than Oman and that the vessel’s tracking system had deliberately been switched off.
At the outset, the CESTAT held that the burden of proving a change in classification rested upon the Customs Department. Referring to the Supreme Court’s decision in Hewlett Packard India Sales Private Limited, the Bench said that the department must discharge this burden even when seeking to alter a classification adopted through self-assessment.
The Tribunal noted that the BIS specification prescribed 12 parameters and 11 testing methods, in addition to visual examination, for determining the nature of Naphtha. In comparison, the CRCL reports were based on a considerably smaller number of parameters.
The Bench found that Geo-Chem, a specialised chemical-testing and cargo-certification agency with a dedicated petroleum-products division, had examined the samples in greater detail and identified the material as Naphtha. IIP, Dehradun, had examined as many as 41 parameters and classified the material as light Naphtha.
Rejecting the department’s contention that the reference made to IIP was suggestive because it described the material as Naphtha, the Tribunal said that a laboratory of IIP’s stature would not accept the description supplied by a party without conducting its own scientific examination.
The Tribunal therefore preferred the conclusions of Geo-Chem and IIP over those of the general departmental laboratories. It observed that reports from specialised agencies with greater capability to test petroleum products deserved preference, particularly where those reports were based on a more comprehensive scientific examination.
The Bench also referred to the Supreme Court’s ruling in Gastrade International v. Commissioner of Customs, Kandla, concerning the “most akin” test for tariff classification. It noted that when the relevant parameters remained inconclusive, the benefit of doubt had to go to the importer.
According to the CESTAT, the department’s reliance on the “most akin” test did not assist its case because the IIP and Geo-Chem reports were based on a much larger number of parameters and established the product’s similarity to Naphtha more convincingly.
The Tribunal further observed that Naphtha is a generic description and NGL is one of its species. It referred to its earlier decision in the Reliance Industries matter, where it was held that NGL fell within the broader meaning of Naphtha under applicable petroleum standards.
Accordingly, the Bench held that Customs had not authoritatively established the classification proposed by it. Whether examined on the basis of scientific similarity, inconclusive test reports or the common-parlance understanding of NGL as a type of Naphtha, the importer’s declared classification could not be disturbed.
The Tribunal also rejected the department’s reliance on WhatsApp chats and other digital material. It found that the mandatory requirements governing the admissibility of electronic evidence under Section 138C of the Customs Act had not been satisfied.
The Bench noted the absence of the prescribed certificate authenticating the electronic records. It also observed that all relevant mobile devices at both ends of the communications were not shown to have been brought within the investigation. Statements adverse to the appellants had also not been properly tested through examination and cross-examination.
The adjudication order, the Tribunal concluded, suffered from reliance on untested facts, unproven documents, uncorroborated statements and electronic evidence that did not satisfy the statutory conditions for admissibility.
It further noted that the department had failed to demonstrate what commercial or fiscal benefit assessee would have obtained by allegedly declaring an incorrect country of origin when no concessional Customs benefit was being claimed on that basis.
Holding the Commissioner’s conclusions to be legally and factually unsustainable, the CESTAT allowed the appeals on merits and set aside the adverse classification, confiscation and consequential penal findings.
The Bench suggested that the legislature consider creating a dedicated provision governing evidence extracted from mobile phones instead of relying solely on Section 138C, which was framed principally in relation to computer-generated records.
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