2009 (7) TMI 1071 - AT - Central Excise

Summary

Issues Involved:
1. Exemption Eligibility for Naphtha: Whether the naphtha used in the manufacture of fertilizers and other by-products qualifies for exemption under Notification No. 6/2002-C.E. and 21/2002-Cus.
2. Utilization of Carbon Dioxide: Whether the use of carbon dioxide, a by-product of naphtha, in the manufacture of ammonium bicarbonate disqualifies the naphtha from exemption.
3. Invocation of Extended Period for Demand: Whether the extended period for demand under Section 11A of the Central Excise Act and Section 28 of the Customs Act is applicable.
4. Imposition of Penalties and Interest: Whether penalties under Section 11AC and 114A, and interest under Section 11AB are justified.

Detailed Analysis:

1. Exemption Eligibility for Naphtha:
The appellants argued that the entire quantity of naphtha was used for manufacturing urea, which is evident from the molecular structure of the end product. They contended that the naphtha was used in the manufacture of fertilizers, and the emergence of carbon dioxide was a technological necessity. The department, however, claimed that the naphtha used to produce carbon dioxide, which was then used to manufacture ammonium bicarbonate (a non-fertilizer product), disqualified the naphtha from exemption. The Tribunal held that the entire quantity of naphtha should be considered used in the manufacture of fertilizers, supported by the Ministry's clarification that incidental by-products do not affect the exemption eligibility.

2. Utilization of Carbon Dioxide:
The appellants explained that carbon dioxide is an inevitable by-product of the naphtha reforming process and is necessary for the ammonia synthesis process. The department argued that the use of carbon dioxide in manufacturing ammonium bicarbonate indicated that the naphtha was not entirely used for fertilizer production. The Tribunal found that the production of carbon dioxide is a natural consequence of the chemical process and its partial use for non-fertilizer products does not negate the exemption, referencing multiple clarifications and judicial precedents supporting this view.

3. Invocation of Extended Period for Demand:
The Show Cause Notice dated 1-6-2007 invoked the extended period for demand, covering the period from 1-4-2002 to 31-3-2007. The appellants contended that they had kept the department informed through declarations and that the longer period was not justifiable. The Tribunal agreed, noting that the appellants had complied with procedural requirements and that the extended period was not applicable. Consequently, the demand for the period prior to 1-5-2006 (Central Excise) and 31-12-2006 (Customs) was barred by limitation.

4. Imposition of Penalties and Interest:
Given that the demand itself was found unsustainable, the Tribunal concluded that the imposition of penalties under Section 11AC and 114A, as well as the demand for interest under Section 11AB, were also unjustified. The appeals were allowed with consequential relief, and no penalties or interest were imposed.

Conclusion:
The Tribunal allowed the appeals, holding that the entire quantity of naphtha used in the manufacturing process qualifies for exemption under the relevant notifications. The production of carbon dioxide as a by-product does not affect the exemption eligibility, and the extended period for demand was not applicable. Consequently, the demands for duty, interest, and penalties were set aside.