Concessional naphtha exemption denied for plant-maintenance uses, and differential duty demand upheld despite limitation objection.

Raw naphtha used to produce ammonia for an inert gas plant and a water treatment plant did not qualify for exemption under Notification No. 187/61, because those uses were for purging, testing, commissioning, maintenance, and protection of plant and equipment rather than manufacture of fertilisers. The resulting diversion of concessional raw naphtha to non-fertiliser uses sustained the differential duty demand. Limitation under Section 11-A did not apply, as the recovery was treated as one under Rule 196 and no statutory time bar was prescribed for that demand.

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Issues: (i) Whether raw naphtha used to produce ammonia for the inert gas plant and water treatment plant was eligible for exemption under Notification No. 187/61 as use in the manufacture of fertilisers; (ii) Whether the demand for differential duty was barred by limitation under Section 11-A or otherwise unsustainable.

Issue (i): Whether raw naphtha used to produce ammonia for the inert gas plant and water treatment plant was eligible for exemption under Notification No. 187/61 as use in the manufacture of fertilisers.

Analysis: The exemption under the notification was confined to raw naphtha intended for use in the manufacture of fertilisers and operating through the Chapter X procedure. The use of ammonia in the inert gas plant was found to be for purging, testing, commissioning, and maintenance of plant and equipment, and the use in water treatment was found to be for producing high-purity water to protect boilers, pipelines, and process equipment from scale and corrosion. These uses were treated as connected with the manufacturing apparatus and plant maintenance, not with the manufacturing process of fertiliser itself.

Conclusion: The use of raw naphtha for ammonia consumed in the off-site inert gas and water treatment plants was not eligible for the concessional exemption, and the finding against the assessee was upheld.

Issue (ii): Whether the demand for differential duty was barred by limitation under Section 11-A or otherwise unsustainable.

Analysis: The show cause notice and the surrounding Chapter X procedure showed that the demand arose from diversion of concessional raw naphtha to non-fertiliser uses. The demand was treated as one under Rule 196, for which no statutory time limit was prescribed, and the omission to cite Rule 196 in the notice did not invalidate the demand. The time limit under Section 11-A was held inapplicable to such a recovery.

Conclusion: The demand was not barred by limitation and was sustainable under Rule 196, and this issue was decided in favour of the Revenue.

Final Conclusion: The exemption claim failed for the disputed off-site uses of ammonia, and the duty demand was upheld as time-barred objections were rejected.

Ratio Decidendi: Use of an input for plant maintenance, commissioning, purging, or protection of manufacturing equipment is utilisation in the manufacturing apparatus, not use in the manufacture of goods for a concessional exemption meant for production of the final product.

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