1996 (7) TMI 147 - SC - Central Excise

Whether assessee liable for exemption Notification (No. 187 of 1961), dated 23rd December, 1961 ? Held that - There can be no doubt that the raw naphtha that was fed by SAIL into its plant was for the purpose and with the intention of manufacturing fertiliser and that it was only because of supervening circumstances, namely, the low, uncertain and fluctuating availability of power, that the reformed gas produced during the interim stage of manufacture had to be vented out. The benefit of the exemption notification is, therefore, available to SAIL in regard to the raw naphtha that it utilised in its plant for the manufacture of fertiliser but which, for reasons over which it had no control, did not, in fact, result in the manufacture of fertiliser but had, at the interim stage of reformed gas, to be vented out. In the result, the appeals are allowed and the judgments and orders of the Tribunal under appeal are set aside.

Issues:
- Interpretation of an exemption notification regarding excise duty on raw naphtha used in the manufacture of fertilizers.
- Dispute over whether raw naphtha was actually used in the manufacture of fertilizers.
- Application of Rule 196 of the Central Excise Rules in determining excise duty liability.
- Consideration of operational challenges affecting the use of raw naphtha in the manufacturing process.

Analysis:

1. The case involved an appeal by Steel Authority of India Ltd. (SAIL) against orders of the Customs, Excise & Gold (Control) Appellate Tribunal regarding the excise duty on raw naphtha used in the manufacture of fertilizers at their plant in Rourkela. The dispute arose when the Revenue alleged that SAIL did not use a substantial quantity of raw naphtha for fertilizer production, leading to demands for excise duty payment.

2. The Tribunal relied on Rule 196 of the Central Excise Rules, which required immediate payment of duty on excisable goods not accounted for as used for the intended purpose. It was found that the raw naphtha in question had been burnt for operational reasons, such as maintaining the plant's operation during power shortages, but did not contribute directly to fertilizer production. As a result, the concessional excise duty rate was deemed inapplicable, and SAIL was held liable for duty payment.

3. In a subsequent order, the Tribunal acknowledged that the raw naphtha was initially intended for fertilizer production, but due to operational constraints, the reformed gas had to be vented out before reaching the ammonia plant. The Tribunal considered the technical necessity of venting the gas during power shortages and pre-commissioning trials, aligning with a circular from the Ministry of Finance allowing excise duty concession for naphtha used in such scenarios.

4. The Tribunal, in its second order, disagreed with its initial decision, emphasizing the technical necessity of venting the reformed gas and the liberal interpretation of the exemption notification to reduce input costs for fertilizers. It concluded that the raw naphtha usage during operational challenges should be considered as intended for fertilizer production, qualifying for the excise duty concession.

5. The Supreme Court upheld the Tribunal's second order, emphasizing that the exemption notification required proof of raw naphtha being "intended for use" in fertilizer manufacturing, rather than actual usage. The Court clarified that duty liability would only arise if it could not be demonstrated that the raw naphtha was used with the intention of manufacturing fertilizers, considering the operational challenges faced by SAIL.

6. Ultimately, the Court allowed SAIL's appeals, setting aside the Tribunal's orders and ruling in favor of SAIL regarding the excise duty on raw naphtha used in fertilizer production. The Court highlighted the operational intent behind the raw naphtha usage and the technical challenges faced by SAIL, granting them the benefit of the exemption notification.

7. The judgment concluded by stating that there would be no order as to costs, bringing an end to the legal dispute over the excise duty liability on raw naphtha used by SAIL in their fertilizer manufacturing process.

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