2001 (1) TMI 88 - SC - Central Excise

Interpretation of exemption notifications for LSHS in fertilizer production sparks legal debate

The appellants, involved in manufacturing fertilizers using Low Sulphur Heavy Stock (LSHS), disputed the interpretation of exemption notifications. The ... Interpretation of the exemption notifications relating to heavy petroleum stock Held that:- The very process of manufacture shows that LSHS, as a result of chemical reaction, becomes gas which is subsequently purified resulting in liquid ammonia which can be regarded as feed stock in contra-distinction to LSHS which is burnt and as a result whereof steam is generated which in turn is used in the process. LSHS is used in the manufacture of ammonia but not as a feed stock. As such, benefit of Notification No. 127/1988 would be available to the appellants in respect of LSHS which has been used for generating steam and this will be with effect from 1st March, 1988. In respect of the earlier period, it is only that part of LSHS which will be entitled to 100 per cent exemption from excise duty by virtue of Notification No. 147/1974 and Notification No. 75/1984 which has been used as feed stock and not for the purpose of generating steam. For the aforesaid reasons, while I.A. No. 3/1995 in C.A. No. 9122/1994 is allowed and it is held that the appellants therein are entitled to the benefit of Notification No. 127/1988 with effect from 1st March, 1988, the appeals are dismissed with no order as to costs. Issues:Interpretation of exemption notifications related to heavy petroleum stock in the manufacture of fertilizers.Analysis:In the present case, the appellants, who manufacture fertilizers, use Low Sulphur Heavy Stock (LSHS) as feed stock in the manufacturing process. The dispute revolves around the interpretation of exemption notifications, specifically Notification Nos. 147/1974, 75/1984, and 127/1988, concerning the use of LSHS in the production of fertilizers.The appellants argued that LSHS was utilized both directly in the manufacture of fertilizers and for generating steam, which was an integral part of the fertilizer production process. They contended that the entire quantity of LSHS should be entitled to full exemption under the relevant notifications.However, the revenue authorities disagreed with this interpretation. They argued that the portion of LSHS used for producing steam should not be considered as being used as feed stock, thereby disqualifying it from full exemption under the notifications.The key contention of the appellants was supported by a decision of the Patna High Court, which held that even the portion of LSHS used for generating steam, leading to the production of liquid ammonia, should be eligible for exemption under the notification.Upon analyzing the language of the exemption notifications, it was established that LSHS could be entitled to full or partial exemption based on its use as feed stock in the fertilizer manufacturing process. The notifications clearly indicated that complete exemption was granted only when LSHS was used as feed stock.The definition of 'feed stock' was crucial in determining the applicability of the exemption notifications. Various sources defined feed stock as the primary material introduced into a plant for processing, emphasizing its role in the manufacturing process.The judgment differentiated between the two ways LSHS was used - as feed stock in the oxidation process leading to the production of liquid ammonia and for generating steam, which was not considered as direct feed stock usage. Consequently, the appellants were granted partial exemption for the period before 1st March 1988 under Notification Nos. 147/1974 and 75/1984, and full exemption under Notification No. 127/1988 from that date onwards.In conclusion, one appeal was allowed, granting the benefit of Notification No. 127/1988, while other appeals were dismissed concerning the use of LSHS for steam production in the fertilizer manufacturing process.