2012 (3) TMI 399 - AT - Central Excise

Summary

Issues Involved:
1. Whether the exemption for naphtha used in the manufacture of fertilizers and ammonia can be extended to naphtha used in other plants.
2. Whether the penalty imposed under various rules and sections is justified.

Issue 1: Exemption for Naphtha Usage
The appellants, M/s. Rashtriya Chemicals & Fertilisers Ltd., received naphtha at a Nil rate of duty from HPCL under various exemption notifications for the manufacture of fertilizers and ammonia. However, the Directorate General of Central Excise Intelligence observed that naphtha was also used in generating steam, which was further used in Turbo Generators for electricity and in a Heavy Water Plant, both of which are non-fertilizer uses. The officers quantified the naphtha used for non-fertilizer purposes and issued show cause notices demanding duty.

The appellants argued that the steam produced from naphtha was primarily for fertilizers, and any shortfall was supplemented by natural gas. They contended that the notifications mentioned "intended use" rather than "actual use," citing the case of DCM Shriram Consolidated Ltd. and State of Haryana v. Dalmia Dadri Cement Ltd. However, the Tribunal found that since both naphtha and natural gas were used simultaneously, it was reasonable to demand duty based on the proportionate use of steam for non-fertilizer purposes. The Tribunal distinguished the appellants' case from DCM Shriram, noting that the latter involved a dedicated power plant, whereas the appellants used a single plant for multiple purposes.

Issue 2: Imposition of Penalty
The Commissioner imposed penalties under Rule 173Q, Rule 25 of the Central Excise Rules, and Sec. 11AC of the Central Excise Act. The Tribunal concluded that the appellants, as recipients of naphtha under Chapter X procedure, were not covered under the definitions in Rule 173Q or Rule 25, thus setting aside penalties under these rules. However, the Tribunal upheld the penalty under Sec. 11AC, stating that the appellants were liable as per the provisions of Rule 196 of the Central Excise Rules and Rule 6 of the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001.

Conclusion:
The Tribunal upheld the duty demand on naphtha used for non-fertilizer purposes and confirmed the penalty under Sec. 11AC, while setting aside penalties under Rule 173Q and Rule 25. The appeals were disposed of accordingly.