2007 (4) TMI 4 - SC - Central Excise

Refinery exempt from duty on naptha & sulphur, but liable for electricity sales. Nexus to petroleum key.

The Court ruled in favor of the petroleum refinery, holding that naptha and sulphur produced from Refinery Fuel Oil were exempt from duty, while ... Demand – Exemption – Deparment contended that none of the three product (naptha, sulphur & electricity) were petroleum products and therefore appellant were liable to pay duty – After considering the detail authority rejected the department contention Issues:1. Interpretation of Central Excise Act, 1944 regarding duty liability on petroleum products.2. Classification of products like naptha, sulphur, and electricity under Central Excise Tariff Act, 1985.3. Application of exemption under Section 35L(b) to refinery products.4. Invocation of extended period of limitation under Section 11A of the Central Excise Act.Analysis:1. The case involved a dispute between the Department and the assessee, a petroleum refinery, regarding the duty liability on products like naptha, sulphur, and electricity produced from Refinery Fuel Oil (RFO). The Department contended that these products were not exempt from duty, leading to demands for arrears of duty for specific periods.2. The Tribunal held that naptha is a petroleum product, entitling the assessee to exemption for RFO used in its production. Similarly, it ruled that sulphur produced from RFO is a by-product, exempting the duty demand on RFO used for sulphur manufacturing. However, the electricity generated from RFO and sold partly to the Tamil Nadu Electricity Board was deemed dutiable, as it did not qualify as a petroleum product.3. The Court emphasized that the 'deemed warehouse' status of the refinery aims to provide duty exemption for RFO used in producing petroleum products, not for non-petroleum items like electricity. It rejected the argument that all products from the refinery should be exempt, highlighting the necessity of a nexus to the final petroleum product for claiming exemption.4. Regarding the invocation of the extended period of limitation under Section 11A, the Court found no suppression by the assessee, a Public Sector Company, as the Department was aware of its operations. Consequently, the demand for arrears of duty for the period December 1993 to July 1998 was deemed beyond limitation, while the demand for the subsequent period was within the limitation.5. The Court remitted the matter to the adjudicating authority for recalculating the duty payable by the assessee for the electricity sold to the Tamil Nadu Electricity Board during a specific period. Additionally, it deemed the penalty imposed on the assessee unjustified, considering the nature of the produced petroleum products and the captive consumption of electricity.6. The judgment referenced relevant legal provisions and precedents to support the conclusions reached, ultimately disposing of the Civil Appeals and Cross Appeals without costs.