2026 (3) TMI 1632 - SC - Central Excise

Intended use exemption for naphtha survives incidental common-plant use; extended limitation and penalty fail without suppression.

An exemption notification for naphtha used in the manufacture of fertiliser or ammonia turns on intended use, not exclusive actual use, where the assessee ... Exemption based on intended use - procuring Naphtha at nil rate of duty - claiming benefit of exemption under notification Nos. 75/84-CE and 4/97-CE dated 01.03.1997, as amended, for ‘intended use’ in the manufacture of fertilizer - Extended period of limitation - Suppression of Facts - Intent to Evade Duty - duty demand - interest and penalty. Intended use in exemption notification - Concessional duty on Naphtha - HELD THAT: - Section 5A of the Central Excise Act deals with the power to grant exemption from duty of excise. As per sub-section (1), if the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the official gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after removal) as may be specified in the notification, excisable goods of any specified description from the whole or any part of the duty of excise leviable thereon. The exemption notification No. 75/1984-CE dated 01.03.1984. This notification was issued by the Central Government in exercise of the powers conferred by sub-rule (1) of Rule 8 of the Central Excise Rules, 1944 exempting the goods described in column (3) of the table appended thereto and included in the first Schedule to the Central Excise Act, 1944 from so much of the duty of excise leviable thereon subject to the intended use or the conditions laid down in the corresponding entry in the table appended. At serial No. 6.02 is mentioned raw Naphtha at the concessional rate of duty as mentioned in column (4). In column (5) of the table, it is mentioned that such concessional rate of duty would be available if the raw Naphtha was procured for the intended use in the manufacture of fertilizers and ammonia. As per the proviso, where the intended use was in the manufacture of ammonia, such ammonia was used elsewhere in the manufacture of fertilizers and the procedure set out in Chapter X of the Central Excise Rules, 1944 was followed. The next notification is notification No. 4/1997-CE dated 01.03.1997. In exercise of the powers conferred by sub-section (1) of Section 5A of the Central Excise Act, 1944, the Central Government being satisfied that it is necessary in the public interest so to do, exempted the excisable goods specified in column (3) of the appended table and included in the Schedule to the Central Excise Tariff Act, 1985 as specified in the corresponding entry to column (2) of the table from so much of the duty of excise leviable thereon as specified in the corresponding entry in column (4), subject to any of the conditions specified in the annexures to the said notification, which were mentioned in the corresponding entry in column (5) of the appended table. At serial No. 8 is mentioned the excisable goods Naphtha and natural gasoline liquid for use in the manufacture of fertilizer or ammonia. The rate of duty is nil and it is subject to condition Nos. 3 and 4 as per the annexure. Condition Nos. 3 and 4 are the same as the conditions mentioned in the proviso to the notification No. 75/84-CE. The first show cause notice is dated 29.08.2001. This show cause notice covers the period from 27.11.1996 to 31.03.2001. Within the aforesaid period, the last period in respect of which the aforesaid show cause notice was issued was from 16.02.2001 to 31.03.2001. The subsequent 25 show cause notices are from dated 05.10.2004 to dated 03.08.2005. The show cause notice dated 05.10.2004 covered the period from September, 2003 to June, 2004. As regards the show cause notice dated 03.08.2005 is concerned, the same covered the period from July, 2004 to February, 2005. The Court held that the governing expression in the notifications was use or intended use in the manufacture of fertilizer or ammonia. Relying on Dalmia Dadri Cement Ltd.[1987 (11) TMI 94 - SUPREME COURT] and Steel Authority of India Ltd [1996 (7) TMI 147 - SUPREME COURT] it held that the notification did not require proof of actual exclusive end-use in every downstream segment, but proof that the goods were procured and used for the purpose and with the intention of manufacturing fertilizer or ammonia. It is quite evident that Naphtha which was procured from HPCL was intended for use by the appellant in the manufacture of fertilizer and ammonia. It is immaterial that a fraction of such procured Naphtha had to be used for generation of electricity which was also mostly used in the manufacture of fertilizer and ammonia but a portion of which had to be used in the chemical plant beside being supplied to the Maharashtra State Electricity Board. If that be the position, appellant would be entitled to avail the benefit of concessional rate of duty in terms of the exemption notifications alluded too hereinabove. The appellant was entitled to the benefit of the exemption notifications and the duty demand on the footing of non-eligible use was unsustainable. Extended period of limitation - Suppression of facts - Revenue neutrality - HELD THAT: - As noted, prior to 08.04.2011, the limitation period under Section 11A of the Central Excise Act was one year. It is thus evident that all the show cause notices issued to the appellant pertained to periods which were beyond one year. In such circumstances, respondent invoked the extended period of limitation under the proviso to sub-section (1) of Section 11A of the Central Excise Act. We have also noted that the extended limitation period of five years would be available to the respondent in a case where any duty of excise has not been levied or not paid or has been short levied or short paid or erroneously refunded by reason of fraud or collusion or on account of any willful mis-statement or suppression of facts or contravention of any of the provisions of the Central Excise Act or of the Rules made thereunder with the intent to evade payment of duty. Thus, fraud, collusion, willful mis-statement or suppression of facts stand in one category and contravention of any of the provisions of the Central Excise Act or the rules made thereunder is another category. In the first category, the act is deliberate and is so egregious that such omission or infraction would by itself be sufficient to attract the extended period of limitation. However, in the later category, the contravention of the statute would have to be accompanied by an intent to evade payment of duty to attract the extended period of limitation. The Court held that invocation of the extended period required fraud, collusion, wilful misstatement or deliberate suppression, or contravention with intent to evade duty. Referring to Pushpam Pharmaceuticals Company [1995 (3) TMI 100 - SUPREME COURT] it reiterated that suppression in this context must be deliberate. The appellant had furnished particulars on the basis of which CT-2 certificates were issued, and the dispute itself turned on interpretation of the expression intended use in the exemption notifications. In that setting, intent to evade duty could not be attributed. The Court further held that the case was revenue neutral, since any duty impact would ultimately stand neutralised, and following Nirlon Limited [2015 (5) TMI 101 - SUPREME COURT] such revenue neutrality ruled out invocation of the extended period. [Paras 49, 50, 56, 57, 58] The demand was barred by limitation to the extent it depended on the extended period, and the penalty sustained on that basis was liable to fail. Final Conclusion: The Court allowed the two civil appeals on both merits and limitation, holding that the appellant was entitled to the exemption on Naphtha and that the extended period could not be invoked. The orders-in-original and the CESTAT order were set aside, and the appeal arising from the rectification proceedings was disposed of as academic. Issues: (i) Whether Naphtha procured under the exemption notifications for use in the manufacture of fertiliser or ammonia remained eligible for exemption when it was used as a supplementary fuel in a common steam generation system that also supported other plants; (ii) Whether the extended period of limitation and penalty were sustainable.Issue (i): Whether Naphtha procured under the exemption notifications for use in the manufacture of fertiliser or ammonia remained eligible for exemption when it was used as a supplementary fuel in a common steam generation system that also supported other plants.Analysis: The exemption notifications issued under Section 5A(1) of the Central Excise Act, 1944 granted nil or concessional duty to Naphtha for use in the manufacture of fertiliser or ammonia, subject to proof of intended use and compliance with Chapter X procedure. The controlling expression was intended for use, not actual exclusive use. The material showed that Naphtha was procured pursuant to CT-2 certificates for use in the fertiliser complex and was consumed in a dual-fuel steam generation system that principally served the fertiliser and ammonia plants. The mere fact that some steam or electricity incidentally supported other units did not defeat the exemption where the declared and certified intended use was satisfied.Conclusion: The exemption was available to the appellant and the demand on merits was unsustainable.Issue (ii): Whether the extended period of limitation and penalty were sustainable.Analysis: The proviso to Section 11A(1) of the Central Excise Act, 1944 applies only where non-levy or short levy is attributable to fraud, collusion, wilful misstatement, suppression of facts, or contravention with intent to evade duty. The appellant had disclosed the relevant particulars to the department and obtained CT-2 certificates on that basis. The dispute turned on the interpretation of the exemption condition, and the exercise was revenue neutral because any duty paid would have been offset through subsidy or credit mechanisms. On these facts, no deliberate suppression or intent to evade could be inferred, and the connected penalty provisions could not survive.Conclusion: The extended period of limitation and penalty were not justified.Final Conclusion: The duty demand, interest, and penalty were set aside, and the assessee succeeded on both merits and limitation.Ratio Decidendi: Where an exemption notification turns on intended use, proof of declared intended use and compliance with the prescribed procedure is sufficient, and the extended limitation period cannot be invoked absent deliberate suppression or intent to evade duty, especially in a revenue-neutral situation.