Revenue Must Prove Product's Suitability As Fuel For 'Motor Spirit' Classification; Supreme Court Dismisses Customs' Appeal Against Reliance Industries

"Burden of proof is on the taxing authorities to show that the particular case or item in question is taxable in the manner claimed by them. Mere assertion in that regard is of no avail." Supreme Court, in a significant judgment delivered on May 25, 2026, has reaffirmed that the primary burden of proof in tax classification disputes rests squarely on the Revenue.

A bench comprising Justice Aravind Kumar and Justice Prasanna B. Varale held that for a product to be classified as 'Motor Spirit' under Chapter 27 of the Customs Tariff, the Revenue must prove not just its chemical properties, but its suitability for use as fuel in spark-ignition engines.

The Court observed that the Department cannot demand higher duties by merely citing flashpoints or distillation ranges without providing cogent evidence regarding the actual use of the product. The bench noted that "the Appellant-Revenue has failed to discharge its duty to prove that the imported product is a Motor Spirit," emphasizing that mere assertions are insufficient to disturb an assessee's classification.

The dispute arose when M/S Reliance Industries Limited imported "n-Hexane" (also known as Exxsol Hexane) and sought clearance under Chapter 29 of the Customs Tariff Act, which covers pure organic chemicals. The Revenue, however, issued a show-cause notice seeking to classify the product under Chapter 27 as a Petroleum Oil/Motor Spirit, which attracts a higher rate of duty.

The Revenue's claim was based on a chemical test report indicating that the product's flashpoint was below 25°C and its distillation range was between 67°C to 70°C. While the Commissioner (Appeals) and the CESTAT ruled in favor of the Assessee, the Revenue approached the Supreme Court contending that n-Hexane was an admixture of hydrocarbons rather than a pure compound.

The primary question before the Court was whether the imported n-Hexane should be classified under CTH 2710.00 as a Petroleum Oil/Motor Spirit or under CTH 2901.10 as a Pure Hydrocarbon existing as a Separate Chemical Compound. The Court was also called upon to determine whether the Revenue had successfully discharged the burden of proof required to change the classification.

Revenue Bears The Burden Of Proof In Classification Disputes

The Court began its analysis by reiterating the settled principle that the onus of proving a particular classification lies on the taxing authorities. Citing the precedent in Union of India v. Garware Nylons Limited, the bench noted that the Revenue must place material—either oral or documentary—to support its claim for a different classification.

The Court emphasized that this burden is to be discharged based on the "preponderance of probability" under the Customs Act. It observed that it is "trite law that in matters of classification of goods, the burden of proof rests on the shoulders of the Revenue," and a failure to do so entitles the assessee to the benefit of the classification they claimed.

"It is for the taxing authority to lay evidence in that behalf even before the first adjudicating authority."

Three Essential Conditions For 'Motor Spirit' Classification

The bench delved into the specific requirements for classifying a product as 'Motor Spirit' under Chapter 27. Referring to its earlier decision in CCE v. GAIL (India), the Court held that three cumulative conditions must be satisfied: the product must be a hydrocarbon oil, it must have a flashpoint below 25°C, and it must be suitable for use as fuel in spark-ignition engines.

In the present case, the Court found that while the Revenue proved the first two criteria (hydrocarbon nature and low flashpoint), it completely failed to address the third. The bench noted that "nothing has been placed on record to conclusively arrive at a finding that n-hexane imported by Respondent-Assessee was used as Motor Spirit."

Court Rejects Mere Emphasis On Flashpoint Without Functional Evidence

The Court criticized the Revenue's reliance on chemical parameters alone to justify the tax hike. It observed that while n-Hexane is indeed a volatile liquid with a low flashpoint, the Assessee had consistently maintained its use as a solvent for vegetable oil extraction and polymerization reaction mediums.

The bench held that "mere emphasis on the flash point being below 25°C will not render the imported product to be placed under Chapter 27." It further noted that the Revenue provided no evidence to counter the Assessee's claim that the product was an industrial solvent rather than a fuel source.

"The contention the Appellant –Revenue is sans cogent evidence to show that the imported substance is a Motor Spirit."

HSN Notes Serve As A 'Safe Guide' For Interpretation

The Court highlighted the importance of the Harmonized System of Nomenclature (HSN) Notes in resolving tariff disputes. It observed that HSN Chapter Heading 29.01 specifically deals with acyclic hydrocarbons and includes Hexane. The Court noted that HSN Notes are an "internationally accepted nomenclature aimed at resolving tariff classification."

The bench found that n-Hexane fits the definition of a "Separate Chemically Defined Compound" as per HSN Chapter Note 1 to Chapter 29. It possesses a constant ratio of elements (C6H14) and a definitive structural diagram, distinguishing it from general petroleum mixtures covered under Chapter 27.

DGFT Policy Circulars Binding On Customs Authorities

A crucial part of the judgment addressed the binding nature of the Directorate General of Foreign Trade (DGFT) circulars. The Court noted that a Policy Circular dated July 14, 2004, had explicitly clarified that the import of Hexane is covered under Chapter 29 of the Indian Trade Classification.

Citing Atul Commodities Private Limited v. Commissioner of Customs, the Court held that any doubt regarding classification under the ITC (HS) must be referred to the DGFT, whose decision is final and binding. The bench remarked that the merits of classification were already clarified by the DGFT, which "bound the authorities."

"The merits of classification of Hexane under Chapter 29 of the Customs Tariff Act was already clarified by the DGFT and the same bound the authorities."

The Supreme Court concluded that n-Hexane is rightly classifiable under CTH 2901.10. It dismissed the Revenue's appeal, stating that the Department cannot be "unjustly enriched due to wrong classification." The Court affirmed the CESTAT's 2011 order, holding that the Revenue's failure to discharge its burden of proof was fatal to its case.

Date of Decision: May 25, 2026