The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has upheld the grant of customs duty exemption to Reliance Industries Limited on the import of a Mono Ethylene Glycol (MEG) Reclamation Plant used in offshore and onshore petroleum operations.
The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) that the exemption could not be denied merely because the plant was classified under Customs Tariff Heading (CTH) 8419, while Serial No. 4 of List 33 attached to Notification No. 50/2017-Customs mentioned tariff heading 8430.
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The Bench affirmed the Commissioner (Appeals)’ finding that the MEG Reclamation Plant was covered by the description “equipment/units for specialised services for offshore and onshore petroleum operations” appearing in List 33.
Reliance Industries imported the MEG Reclamation Plant through ten Bills of Entry filed between January 3, 2023 and June 17, 2024. The plant was classified under CTH 84198990, and the company claimed exemption under Serial No. 404 of Notification No. 50/2017-Customs dated June 30, 2017.
The plant was purchased under a single purchase order dated June 28, 2021. However, it was imported in an unassembled form through eight consignments for ease of transportation.
Customs authorities did not initially accept the exemption claim. Reliance was consequently permitted to clear the consignments by paying duty at the applicable merit rate under protest, while the assessments remained provisional.
The Assistant Commissioner of Customs, Kakinada, subsequently finalised the assessments and denied the exemption. The officer reasoned that the relevant entry in List 33 referred to tariff heading 8430, whereas the MEG plant was classifiable under heading 8419.
The adjudicating authority also relied on an amendment effective from July 24, 2024, through which equipment and units for MEG reclamation and regeneration facilities falling under tariff item 841989 were specifically included in List 33. According to the authority, this amendment indicated that the plant was not covered by the exemption before that date.
Reliance challenged the decision before the Commissioner (Appeals), who set it aside and allowed the exemption. The Customs Department then approached CESTAT.
Reliance had entered into a Production Sharing Contract with the Government of India for the exploration, development and production of oil and gas in the KG-D6 block. The company was the operator of the block.
The Tribunal recorded that MEG is injected at wellheads during oil and gas exploration to prevent hydrate formation. The production fluid—containing natural gas, associated condensate, produced water and injected MEG—is transported from the offshore facility to an onshore processing terminal at Kakinada.
The reclamation plant processes and reclaims the injected MEG at the onshore terminal.
There was no dispute that Reliance was a “specified person” under the exemption notification or that the imports related to petroleum operations undertaken under the New Exploration Licensing Policy. It was also undisputed that the consignments together constituted a complete MEG Reclamation Plant under Rule 2(a) of the General Rules for Interpretation of the Customs Tariff.
The Directorate General of Hydrocarbons had certified on December 16, 2022 that the plant was meant for specialised offshore and onshore petroleum operations and was necessarily required for producing natural gas.
The Customs Department argued that the description given in Column 3 of List 33 could not be read independently of the heading mentioned in Column 2.
According to the Department, goods covered by Serial No. 4 were required to satisfy both the description in Column 3 and the corresponding tariff heading 8430 in Column 2. Since the MEG Reclamation Plant fell under heading 8419, it was argued that the exemption was unavailable before the specific amendment made in July 2024.
The Department further submitted that the Directorate General of Hydrocarbons was not competent to decide whether the goods qualified for the customs exemption. Its certification concerning the use of the plant could not, by itself, establish eligibility under the notification.
Reliance, on the other hand, maintained that Serial No. 404 of the notification required the goods to fall within one of the chapters specified in Column 2 of the main table. Chapter 84 was expressly included in that column.
The company argued that the notification referred to the description in Column 3 of List 33 but did not require the goods to correspond with the headings appearing in Column 2 of that list.
CESTAT agreed with Reliance’s interpretation.
The Tribunal observed that the main table to Notification No. 50/2017-Customs covered goods falling under specified chapters, headings, subheadings or tariff items. In the case of Serial No. 404, the entry covered goods falling under several chapters, including Chapter 84.
The description in the main table referred to goods specified in Column 3 of List 33 when imported by a specified person for eligible petroleum operations.
The Bench found that the language of the notification referred to the description contained in Column 3 of List 33. It did not state that the description must additionally be read with the tariff heading appearing in Column 2 of that list.
Since the MEG Reclamation Plant fell under Chapter 84 and satisfied the relevant description in List 33, the Tribunal held that the exemption requirements had been met.
The Tribunal examined the scope of heading 8430 and observed that it primarily covers machinery used for excavation, drilling, digging, grading, levelling, scraping, tamping, compacting, extracting or boring earth, minerals or ores.
While petroleum and gas-well drilling machinery may fall under this heading, it could not accommodate the entire range of equipment used for specialised offshore and onshore petroleum services.
The expression “equipment/units for specialised services for offshore and onshore petroleum operations” has a much wider scope, the Bench said. Such equipment could include items used for diving, cementing, logging, casing repair, production testing, mud services, reservoir engineering, geological work, stimulation, data acquisition, solids control, well control and non-destructive testing.
Except for certain drilling-related machinery, many such items would not fall under heading 8430.
The Tribunal found it inconceivable that every possible piece of equipment or unit used for specialised petroleum operations could be classified under a single heading. Restricting the exemption to heading 8430 would effectively make a substantial part of the description in Column 3 redundant.
CESTAT also relied on a clarification issued by the Tax Research Unit of the Ministry of Finance on July 7, 2022.
The clarification concerned cases in which exemption under Serial No. 404 was denied due to a mismatch between the tariff heading and the description of petroleum-sector goods.
According to the Tribunal, the clarification showed that the government intended to exempt items covered by the description where those items were critical for petroleum operations, notwithstanding discrepancies in the corresponding tariff headings.
The Bench said this supported the conclusion that the exemption was intended for goods described in Column 3 rather than being restricted by the headings appearing in Column 2 of List 33.
It also accepted the relevance of the Directorate General of Hydrocarbons’ certification. The Directorate had not attempted to classify the imported goods or determine their legal eligibility under the exemption notification. It had only certified their nature, end use and necessity for natural gas production.
In the absence of contrary evidence, the certification could not be ignored, the Tribunal observed.
The Tribunal rejected the Department’s contention that the insertion of a specific entry for MEG reclamation equipment from July 24, 2024 established that such equipment was ineligible for exemption during the earlier period.
It held that the creation of a specific entry does not necessarily mean that the goods were excluded from an existing general entry before the amendment.
For the period preceding the amendment, the MEG Reclamation Plant was covered by the general description of equipment or units used for specialised petroleum operations. Following the amendment, the plant would be governed by the newly carved-out specific entry.
The subsequent amendment, therefore, did not take away the exemption already available under the broader description.
The Department relied on the Supreme Court’s Constitution Bench ruling in Commissioner of Customs v. Dilip Kumar & Company, under which ambiguity in an exemption notification must ordinarily be resolved in favour of the Revenue.
CESTAT, however, held that the principle was not applicable because the notification did not contain any ambiguity on the relevant issue.
A plain reading of the notification showed that the description of goods in Column 3 of List 33 was decisive, provided the goods were covered by the chapters specified in Column 2 of the main table and satisfied the stipulated importer and end-use conditions.
The Bench also noted that the exemption was intended to encourage petroleum and natural gas exploration, production and processing under government licensing policies. It was, therefore, a beneficial and promotional exemption designed to further an important economic objective.
The purpose of the exemption could not be defeated through a narrow or purely formal interpretation, the Tribunal said.
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