Exemption for manufacturing inputs applies to integral steam generation, but not to diverted methanol use outside the factory.

An exemption notification covering specified inputs used as feed stock in manufacture was construed to apply to furnace oil and heavy petroleum stock used to generate steam, because steam generation formed an integral part of the fertilizer manufacturing process and the inputs qualified for the relief. The same exemption did not extend to heavy petroleum stock and furnace oil used in the manufacture of methanol to the extent the methanol was sent outside the factory unit, because the notification protected the covered input use within the contemplated manufacturing purpose and not downstream diversion beyond the unit. The exemption was therefore available for the steam-generation use but denied for the diverted methanol use.

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Issues: (i) Whether furnace oil and heavy petroleum stock used for generation of steam qualified as feed stock for the manufacture of fertilizers under the exemption notification. (ii) Whether the benefit of the exemption notification was available in respect of heavy petroleum stock and furnace oil used in the manufacture of methanol which was partly sent for use outside the factory unit.

Issue (i): Whether furnace oil and heavy petroleum stock used for generation of steam qualified as feed stock for the manufacture of fertilizers under the exemption notification.

Analysis: The notification was construed to extend to inputs used as feed stock in the manufacture of fertilizers. The use of furnace oil and heavy petroleum stock for generation of steam was treated as an integral part of the manufacturing process, and therefore as qualifying use for the exemption.

Conclusion: In favour of the assessee.

Issue (ii): Whether the benefit of the exemption notification was available in respect of heavy petroleum stock and furnace oil used in the manufacture of methanol which was partly sent for use outside the factory unit.

Analysis: The notification covered the duty-free issue of furnace oil and heavy petroleum stock, not methanol as a finished/intermediate product. To the extent methanol manufactured from those inputs was sent to another unit outside the factory, the exempted inputs could not continue to enjoy the benefit for that diverted use.

Conclusion: Against the assessee.

Final Conclusion: The exemption was upheld for furnace oil and heavy petroleum stock used as feed stock for steam generation, but denied to the extent the resultant methanol was diverted for use outside the concerned unit.

Ratio Decidendi: Where an exemption notification grants relief to specified inputs used as feed stock in manufacture, the exemption applies to their integral use in the manufacturing process but does not extend to downstream product use beyond the covered unit or purpose.

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