Intermediate-product exemption for residual crude oil applies to bonded warehouse clearances, with duty recoverable only for nil-rate clearances.

Residual crude oil used as fuel to generate steam and electricity for manufacture of final petroleum products remained eligible for exemption where those final products were cleared under bond to a licensed warehouse, because such clearances are not treated as nil-rate or exempt clearances. The exemption was denied only to the extent the final products were actually cleared at nil rate of duty, in which case proportionate duty on the residual crude oil relatable to those clearances could still be recovered. The operative distinction was between bonded warehouse clearances and genuine nil-duty clearances for purposes of intermediate-product exemption.

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Issues: Whether residual crude oil used as fuel for generating steam and electricity was entitled to exemption when the final petroleum products were cleared under bond to a warehouse, and whether duty could still be demanded only for the quantity relatable to clearances at nil rate of duty.

Analysis: The exemption notifications for intermediate products were applicable where the final products were cleared on payment of duty, and not where the final products were cleared at nil rate of duty or were exempt from duty. A clear distinction was drawn between final products removed under bond to a licensed warehouse and final products actually cleared at nil rate of duty. On the facts, the bulk of the naphtha and low sulphur heavy stock was removed under bond to a warehouse, and the relevant principle from earlier decisions was that such clearance could not be treated as a clearance at nil rate of duty or as exempt clearance. Accordingly, duty on residual crude oil used as direct fuel for producing steam and electricity for manufacture of those bonded clearances was not sustainable. However, where a small quantity of the final products was admittedly cleared at nil rate of duty, the corresponding proportionate duty on the residual crude oil relatable to such clearances remained recoverable.

Conclusion: The assessee was entitled to exemption in respect of residual crude oil used for manufacture of final products cleared under bond, but duty was upheld only to the limited extent attributable to the quantity of final products cleared at nil rate of duty.

Ratio Decidendi: Clearance of final products under bond to a licensed warehouse is not to be treated as clearance at nil rate of duty or as exempt clearance for the purpose of denying exemption to an intermediate product used in their manufacture.

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