Crude Degummed Soybean Oil Is Not Agriculture—It's Manufacture: Supreme Court Slams Customs for Denying Duty Exemption

“Circulars Can’t Rewrite Statutory Notifications—No Executive Power to Expand Exclusion by Interpretation”: In a judgment that marks a significant reaffirmation of judicial control over executive overreach in tax and trade policy, the Supreme Court of India held that crude degummed soybean oil is not an ‘agricultural product’ and thus eligible for customs duty exemption under the Export-Import (EXIM) Policy 2002–2007. Supreme Court categorically struck down a 2004 customs circular that had sought to extend the exemption denial beyond the statutory text.

“The Board could not have expanded the scope of the expression ‘other than agricultural and dairy products’… by including all types of products derived from agriculture or dairy origin, including crude edible oil. If this is accepted, it would amount to rewriting the conditions of exclusion from exempted goods… This is impermissible,” declared a Bench of Justices Abhay S. Oka and Ujjal Bhuyan, in a sharp rebuke to the Revenue authorities.

“You Cannot Tax by Circular What the Law Does Not Prohibit”: SC Rejects Revenue's Expansion of Exclusion Clause

At the heart of the case was a customs exemption notification—No. 53/2003-Cus. dated 01.04.2003—which allowed duty-free imports for recognized exporters under the Duty-Free Credit Entitlement Scheme. The notification excluded “agricultural and dairy products” from the ambit of duty-free goods.

However, a departmental circular dated 30.01.2004 expanded this exclusion, stating that “all products derived from agriculture or dairy origin including crude edible oil shall not be permitted.” This administrative act, the Court held, had no legal footing.

“A circular cannot override a statutory notification… The administrative circular cannot whittle down the scope of an exemption granted by law. It is not legislation,” the Court said, citing precedents from Tata Teleservices and Union of India v. Inter Continental.

“Crude Degummed Soybean Oil Is a Distinct Manufactured Product, Not Agriculture”

The Customs authorities had also denied exemption on the ground that the imported item—crude degummed soybean oil—was derived from soybeans, an agricultural product, and thus fell under the excluded category.

Rejecting this reasoning, the Court held: “While soybean is an agricultural product, crude degummed soybean oil is not. The process undertaken transforms it into a distinct commodity with different identity, character, and use.”

“The High Court missed the point entirely by reasoning that because the oil was not directly consumable, it could not be distinct in identity. This is not the test of manufacture.”

Drawing on Constitution Bench precedents like Delhi Cloth & General Mills and Pio Food Packers, the Court reiterated: “To constitute manufacture, there must emerge a new product with a distinct name, character, or use—crude degummed soybean oil satisfies this test.”

“What Is Excluded Must Be Narrowly Construed—Soybean Oil Not Covered by Notification’s Exclusion Clause”

The Court observed that ‘agricultural products’ was not defined under the EXIM Policy or the customs notification and thus had to be understood in commercial and legal parlance. Referring to Black’s Law Dictionary and judicial precedents, the Bench concluded:

“Agricultural product means a product in its natural, unmanufactured condition. The process that produces crude degummed soybean oil transforms the raw soybean into a new commercial commodity.”

“Therefore, crude degummed soybean oil is not excluded under the 2003 Notification. It falls within the category of inputs permissible for duty-free import.”

“Executive Cannot Bypass Law Through Clarifications and Circulars”: Court Cancels ₹1 Crore Duty Demand

The appellant had imported crude degummed soybean oil through MMTC under a valid certificate but was later denied the benefit based on the 2004 circular. A duty demand of ₹1,00,38,321 was raised, which was upheld by the Gujarat High Court.

The Supreme Court, however, declared: “The circular cannot have the effect of rewriting the notification. It is of no legal consequence. The duty demand raised on that basis must fall.”

The Court also found no merit in the Revenue’s argument that the imported product lacked “nexus” with the exported items like soybean meal extract. It emphasized that both were classified as food products, and the license permitted such imports, especially when done through authorized channels like MMTC.

The Supreme Court’s ruling not only safeguards the rights of genuine exporters under the EXIM Policy but also sets a constitutional boundary on administrative interpretations that encroach upon legislative intent.

“A circular cannot become the basis for imposing duties or denying exemptions where the law does not warrant it,” the judgment emphasized.

By restoring the exemption and setting aside the ₹1 crore demand, the Court has reaffirmed the fundamental tenet of rule of law over bureaucratic discretion, delivering much-needed clarity for import-export stakeholders.

Date of Decision: May 14, 2025