Proportionate duty on concessional naphtha for mixed-use steam generation upheld, while only the statutory penalty survived.

Concessional naphtha meant for fertilizer or ammonia manufacture was held dutiable to the extent it was attributable to non-fertiliser use where the fuel fed a common steam-generation system serving both eligible and ineligible units, and the department's proportionate quantification was accepted as reasonable. Earlier decisions were distinguished because they concerned different notification language or supplier-side exemptions. Penalties under Rule 173Q and Rule 25 were set aside because the recipients were not within the classes covered by those provisions, but penalty under Section 11AC was sustained because the duty liability arose under the applicable statutory recovery framework and the ingredients for that penalty were met.

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Issues: (i) Whether duty was demandable on naphtha received at concessional/nil rate where the fuel was used in a common steam-generation system and part of the steam ultimately supported non-fertiliser activities; (ii) whether penalties under Rule 173Q and Rule 25 could be sustained, and whether penalty under Section 11AC was attracted.

Issue (i): Whether duty was demandable on naphtha received at concessional/nil rate where the fuel was used in a common steam-generation system and part of the steam ultimately supported non-fertiliser activities.

Analysis: The exemption notifications covered naphtha for use in the manufacture of fertilizer or ammonia and required proof that the goods were cleared for the intended use. The steam-generation plant used naphtha and natural gas together, and the steam so generated was distributed among several plants, including non-fertiliser units. Since the fuels were not separately stored or segregated into identifiable streams, the proportionate basis adopted by the department for quantifying diversion to non-fertiliser use was held to be reasonable. The claim that naphtha was in short supply did not assist the appellants because that factual premise was not established as part of the operative demand. The reliance placed on earlier decisions was distinguished on the footing that those cases involved different notification language or a supplier-side exemption.

Conclusion: Duty was correctly demanded on the quantity of naphtha attributable to non-fertiliser use, and the demand was upheld.

Issue (ii): Whether penalties under Rule 173Q and Rule 25 could be sustained, and whether penalty under Section 11AC was attracted.

Analysis: The appellants, as recipients under Chapter X and the concessional-removal rules, were not the manufacturer, producer, warehouse-keeper, or registered dealer contemplated by Rule 173Q or Rule 25. Those penalties therefore could not be imposed on them. Section 11AC, however, was applicable because the duty liability arose under the statutory recovery provisions made applicable to the recipient, and the section provides for penalty equal to the duty determined in cases of non-levy or short-levy with the requisite statutory ingredients.

Conclusion: Penalties under Rule 173Q and Rule 25 were set aside, while penalty under Section 11AC was sustained.

Final Conclusion: The duty demand was maintained on the quantified non-fertiliser consumption of naphtha, but the appellants obtained partial relief against the penalties, with only the statutory penalty under Section 11AC surviving.

Ratio Decidendi: Where concessional excisable goods are received for a specified intended use but are consumed through a common process serving both eligible and ineligible uses, duty may be recovered on a proportionate basis attributable to the ineligible use; penal liability must be confined to the specific statutory provision applicable to the person and the transaction.

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