2009 (1) TMI 208 - HC - Central Excise

Naphta Exemption from Excise Duty - In the light of the aforesaid judgements of Hon ble the Supreme Court it becomes evident that on principle as well as on precedents questions raised before us deserved to be answered in favour of the assessee and against the revenue. Accordingly we hold that the view taken by the Tribunal is not correct in law in holding that the benefit of exemption notification dated 23-7-1996 was not available to the assessee. The benefit of the notification No. 8/96 dated 23-7-1996 would enure to the appellant.

Summary

Issues Involved:
1. Whether the Tribunal was correct in law in holding that the benefit of Exemption Notification No. 8/96-CE dated 23-7-1996 was not available to the assessee as the Ammonia produced from Naphtha was not used for the manufacture of fertilizer.
2. Whether on the facts and circumstances of the case, penalty under Rule 173Q(1) of the Central Excise Rules, 1944 was exigible on the assessee.

Issue-wise Detailed Analysis:

1. Exemption Notification Applicability:
The appellant, engaged in manufacturing fertilizer using Naphtha, claimed exemption from duty under Notification No. 8/96-CE, dated 23-7-1996, as amended by Notification No. 4/97 dated 1-3-1997. The exemption was claimed on the basis that Naphtha was used to produce Ammonia, which is then used to manufacture fertilizer. The Tribunal had rejected this claim, stating that the benefit of the notification was not available since Naphtha was used to manufacture intermediate industrial products like Ammonium Nitrate and Nitric Acid, which were marketable.

The High Court examined the relevant notifications and determined that the exemption was applicable if Naphtha was used in the manufacture of fertilizer or Ammonia. The Court noted that the appellant had indeed used Naphtha to produce Ammonia, thereby fulfilling the conditions of the exemption notification. The Court referred to the Supreme Court's judgment in Gujarat State Fertilizer Company v. C.C.E., which clarified that the benefit of the notification becomes available the moment Naphtha is converted into Ammonia, regardless of further processing into other products.

2. Imposition of Penalty:
The Tribunal had imposed a penalty of Rs. 10 lakhs on the appellant under Rule 173Q(1) of the Central Excise Rules, 1944, for allegedly misusing the exemption notification. The High Court, however, found that since the appellant had correctly availed the exemption for using Naphtha to produce Ammonia, the imposition of the penalty was unwarranted. The Court held that the revenue's interpretation that the exemption was not applicable due to the production of intermediate industrial products was incorrect.

Judgment:
The High Court allowed the appeal, setting aside the Tribunal's order. It held that the benefit of the exemption notification dated 23-7-1996 was indeed available to the appellant as Naphtha was used to produce Ammonia. Consequently, no penalty was leviable on the appellant. The Court directed that the necessary adjustments be made within two months from the date of receipt of a certified copy of the order.