Supreme Court Sets Aside Excise Demand On RCF, Says Exemption On Naphtha Depends On Intended Use

The Supreme Court has set aside central excise duty demands raised against Rashtriya Chemicals and Fertilizers Ltd over alleged wrongful availment of exemption on Naphtha procured for use in the manufacture of fertilizer, holding that in the facts of the case the benefit of the exemption notification could not be denied merely because the fuel was used in a common steam generation plant supplying different units of the factory.

The case arose from a series of show cause notices issued over different periods, one of which involved a duty demand of more than Rs 28.55 crore.

A bench comprising Justice Manoj Misra and Justice Ujjal Bhuyan noted that the exemption notification made the benefit conditional on proof “that such goods were cleared for the intended use specified," while the demand in the present case was raised on the basis that “the percentage of consumption of Naphtha in the generation of steam used in the plants other than fertilizer and ammonia could not be arrived at directly”.

The court held that the dispute had arisen because the department sought to determine actual use on a proportionate basis even though the fuel was used in a common steam generation plant supplying different units of the factory.

The case arose after the Revenue alleged that the public sector undertaking had wrongly availed exemption on Naphtha obtained at nil rate of duty under notifications granting relief to inputs used in the manufacture of fertilizer or ammonia.

According to the department, the Naphtha was burnt in a steam generation plant where it was used together with natural gas, and the steam so generated was supplied to different plants including the fertilizer unit, chemical unit, turbo generators, and other facilities. On that basis, several show cause notices were issued demanding duty, interest, and penalty. This included a show cause notice seeking over Rs 28.55 Crore.

The adjudicating authority confirmed the demand, and the Customs, Excise and Service Tax Appellate Tribunal upheld the demand on a proportionate basis, holding that duty exemption would not be available to the extent the fuel was used for purposes other than the manufacture of fertilizer or ammonia.

Before the Supreme Court, the assessee contended that Naphtha and natural gas were used simultaneously in a common boiler to generate steam for the entire plant and that it was not possible to segregate the exact quantity of fuel used for each unit. It was argued that the notification required proof of intended use and that the fuel had been procured for use in the manufacture of fertilizer, even though the steam generated from the fuel was distributed through a common utility system.

After examining the notification and the statutory scheme, the court held that the condition for exemption was linked to the intended use for which the goods were procured, and that the demand had been raised by applying a proportionate formula because the exact quantity of fuel used in each unit could not be determined.

In the facts of the case, the court found that the denial of exemption on that basis was not justified.

On limitation, the Court found that the extended period under Section 11A of the Central Excise Act was not available to the department, as there was no material to show fraud, collusion, wilful misstatement, or suppression of facts with intent to evade duty. Referring to the proviso to the provision, the bench noted that the longer limitation period can be invoked only where non-payment of duty is “by reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty”.

Having reached that conclusion, the court set aside the findings recorded by the adjudicating authority, the CESTAT, and the Bombay High Court, all of which had sustained the duty demand along with interest and penalty, and allowed the appeals filed by the RCF.

For Appellant: Senior Advocate Balbir Singh Advocates Karan Sachdev, H. G. Dharmadhikari, Shivani Shah, Lalita Phadke, Rahul Krishna, Praveen Agnihotri, Siddharth Singh, Rajkumar Prasad, Vinod Kumar, Alek Apurv, Mohit Singh, Manisha Sharma, Devavrat Anand, Alekh Apurv Advocate-on-Record Rajesh Kumar, Mukesh Kumar Maroria

For Respondent(s): Additional Solicitor General Vikramjit Banerjee, Senior Advocate Devashish Bharukha Advocates M. H. Patil, Sandeep Narain, Manasi Patil, Viraj Reshamwalla, Siddharth Sinha, Shubhendu Anand, Rajeev Ranjan Advocate-on-Record M/s S. Narain & Co., Gurmeet Singh Makker, B. Krishna Prasad