Natural Gas Compression For Transport Is Not Manufacture; CESTAT Kolkata Quashes ₹8.97 Crore Excise Demand

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Kolkata, has set aside an excise duty demand of ₹8.97 crore against Great Eastern Energy Corporation Ltd. (GEECL), ruling that compressing natural gas solely to facilitate transportation does not amount to the manufacture of compressed natural gas (CNG).

Relying on its earlier ruling in GEECL's own case and its decision in Essar Oil and Gas Exploration and Production Ltd., the tribunal observed, "The above two case laws make it clear that the activity of compression taken up by the appellant for transportation does not amount to manufacture in terms of Section 2(f) of the CEA 1944."

A bench of Judicial Member R. Muralidhar and Technical Member K. Anpazhakan also set aside the penalties imposed on the company's chairman and CEO, Yogendra Kumar Modi, after quashing the principal demand.

GEECL extracts natural gas from coal bed methane (CBM) wells and compresses it before transporting it to industrial customers. The dispute centred on gas carried in cascades and later decompressed at customers' premises before being supplied as natural gas. The department claimed these clearances attracted excise duty, and the adjudicating authority confirmed demands totaling ₹8.97 crore with interest and penalties. The Commissioner (Appeals) upheld those orders.

Before the tribunal, GEECL argued that compression was undertaken only to facilitate transportation and that the gas was never marketed or sold as CNG.

It relied on an earlier tribunal ruling in its favour on the same issue and the Allahabad High Court's decision in Bhushan Steel Ltd., which held that compression carried out only for transportation does not convert natural gas into CNG for taxation purposes.

The revenue argued that the compression process amounted to manufacture under Section 2(f) of the Central Excise Act and therefore attracted excise duty.

The tribunal found that the facts were identical to GEECL's earlier case and also referred to its decision in Essar Oil and Gas Exploration and Production Ltd., where the Bolpur Commissionerate had accepted, after verification, that compression carried out only for transportation does not amount to the manufacture of CNG.

With the duty demand set aside, the tribunal held that the penalties imposed on Yogendra Kumar Modi could not survive and allowed all the appeals with consequential relief.

For Appellants: S.K. Goyal, Chartered Accountant

For Revenue: B.K. Singh, Authorized Representative