Captive consumption exemption survives where fuel oil supports refining operations and sulphur emerges only as an incidental by-product.

Captive consumption of residual fuel oil used in the refining process for generation of steam did not lose exemption merely because sulphur was recovered as an incidental by-product. The Tribunal relied on its earlier finding, affirmed by the Supreme Court, that no fuel oil was consumed with the object of manufacturing sulphur and that sulphur was extracted only to meet sulphur-limit requirements in petroleum products. On that basis, exemption under Notification No. 67/95-C.E. remained available and duty demand on the disputed fuel oil was not sustainable.

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Issues: Whether the captive consumption of Residual Fuel Oil attributable to the extraction of sulphur cleared without payment of duty was ineligible for exemption under Notification No. 67/95-C.E. dated 16.03.1995.

Analysis: The dispute turned on whether the fuel oil was used for manufacture of sulphur, or whether it was used in the refinery for generation of steam and for the manufacture of petroleum products, with sulphur emerging only as an incidental by-product. The Tribunal's earlier decision in the assessee's own case had held that the refinery consumed fuel oil for generating steam required in the refining process and that sulphur was extracted only because the petroleum products had to conform to sulphur limits. That finding, which was affirmed by the Supreme Court, showed that no quantity of fuel oil was used with the object of manufacturing sulphur. Accordingly, the exemption could not be denied merely because sulphur was cleared without payment of duty.

Conclusion: The captive consumption exemption remained available and the demand of duty on the disputed quantity of fuel oil was not sustainable.

Ratio Decidendi: Where fuel oil is consumed in the refining process for generation of steam and the alleged exempt clearances arise only from an incidental by-product, duty cannot be demanded on the footing that the fuel oil was used to manufacture the by-product.

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