TaxTMI 
TaxTMI 
2009 (7) TMI 1071
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....n 114A Rs. 1,07,65,000/-under Section 112(a) Rs. 1,07,65,000/-under Section 114A Duty within the normal period of limitation (1-5-06 to 31-3-2007) Rs. 1,22,10,000/- Credit available within normal period Rs. 92,67,000/- 2. We heard both sides. 3. The appellants manufacture Fertilizers. In the course of the manufacture of fertilizers, many intermediate products emerge as technological necessity. Most of such products are captively consumed in the further manufacture of fertilizers. Few are sold either as such or after conversion to independent buyers as by products. The present appeal relates to the emergence and use of a portion of 'carbon dioxide' within the factory. The appellants received raw naphtha from oil companies without payment of duty for use in the manufacture of fertilizers by following the prescribed procedure. The relevant notification is 6/2002-C.E., dated 1-3-2002 in terms of which the appellant procured naphtha free of duty by following the procedure set out in the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001. They had also imported naphtha without payment of duty under Notification No. 21/2002....
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....e manufacturing process for reaction with ammonia to form urea. Earlier, the appellants were selling the excess carbon dioxide on payment of appropriate duty. A part of the excess carbon dioxide so generated is also used by the appellants to manufacture a by product called Ammonium bicarbonate for which they use admittedly duty paid ammonia. The Ammonium bicarbonate manufactured as a by product is cleared on payment of duty. 3.2 Revenue proceeded against the appellants to demand Central Excise Duty and Customs Duty along with interest on the ground that the exemption availed in respect of naphtha procured by the appellants is available only to the extent of naphtha used in the manufacture of fertilizers and, therefore, the quantity of naphtha used to produce carbon dioxide, which was used in the manufacture of Ammonium Bicarbonate would not be entitled to the exemption Notification No. 6/2002-C.E., dated 1-3-2002 and 21/2002-Cus., dated 1-3-2002. In other words, it was contended that the Carbon dioxide used for the manufacture of a non-fertilizer product namely Ammonium Bicarbonate would disentitle a proportionate quantity of Naphtha from exemption. The Commissioner, in the impugn....
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....uantum of ammonium bicarbonate manufactured. Based on the theoretical method, the quantum of naphtha allegedly used for other purposes has been arrived at and duty quantified. It was submitted that the very fact of adoption of a theoretical formula indicates that it is not possible to determine what quantity of naphtha that was allegedly used by the appellants in the manufacture of non-fertilizer products. If the allegation of use of naphtha for non-fertilizer purposes was really correct, then, the quantum of naphtha put to such use could have been easily ascertained from the appellant's records. The Notifications require "an intention to use the duty free Naphtha in the manufacture of fertilizers". The condition No. 4 in Sl. No. 22 of the relevant notification is "if such Naphtha is for the intended use of manufacture of fertilizer or Ammonia in the appellant's factory". Once the entire quantity of naphtha received duty free has been subjected to thermal cracking with an intention to further continue the process resulting in the manufacture of fertilizer, then, the entire quantity of naphtha should be considered to have been used in the manufacture of fertilizer notwithstanding th....
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....made that the longer period is not invocable. 4.4 The Commissioner's reliance on the decision of the Tribunal in the case of FACT v. CC, Cochin - 1987 (29) E.L.T. 111 (T) is not correct because in that case, the Ammonia, which was obtained during the process of naphtha was sold directly by the assessee to a non-fertilizer plant. Therefore, the tribunal held that the quantity of naphtha, which was sold by the assessee, is not entitled for concessional rate of duty. The above decision is not applicable to the present case. 4.5 Even the decision of the Tribunal in the case of Neyveli Lignite Corporation Ltd. v. CCE, Pondicherry - 2007 (209) E.L.T. 310 is wrongly applied. In the said case, it was not the technological necessity for the assessee to captively consume the electricity produced by it nor was it necessary to use it for mining. 4.6 Commissioner's reliance on the case of CCE v. Solaris Chemtech Ltd. - 2007 (214) E.L.T. 481 (S.C.) = 2007-TIOL-135-S.C.-CX is clearly distinguishable from the appellant's case inasmuch as a portion of electricity generated was used for lighting the colonies and consequently, the Revenue was able to establish that the fuel oil required for genera....
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....sed as an input in several ways or sold as such. Therefore, the argument that CO2 occurs in the process as an inevitability is not correct. Consequently, the argument that CO2 generation is not intended to commercially exploit the duty free naphtha is not true or correct. 5.3 The adoption of a theoretical formula to arrive at the apportionment of naphtha used for non-fertilizer applications is an accepted way of estimating quantities of inputs and output in respect of chemical processes, which are continuous and which take place in controlled conditions. Further, the quantification is based on the calculations produced by the appellant. 5.4 The argument that exemption notifications do not contemplate actual use of naphtha in the manufacture of fertilizers has no merits as condition No. 4 read with column 3 of the table in Notification 6/2002 clearly points out to the fact that naphtha and natural gasoline liquid should be for 'use in the manufacture of fertilizer or ammonia". Hence the condition specifies a specific use and not mere intention to use. This view finds full support from the Tribunal's decision in the case of FACT v. CC, Cochin which has been affirmed by the Apex Cou....
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....oduct ammonium carbonate. Hence, according to the department, the quantity of naphtha attributable to the Carbon dioxide so diverted would not be entitled for the benefit of the exemption notification. Consequently Show Cause Notices have been issued and the Adjudicating Authority had passed a detailed order and confirmed the demands. We have to examine carefully the contentions of both sides. The process of manufacture had already been narrated. We do not want to repeat it. Naphtha is a Hydrocarbon consisting of hydrogen and carbon. Without getting involved in chemical equations and formulae, we have to state that for every one part of hydrogen by weight, there are 5.3 parts of carbon by weight. In other words, the proportion of carbon is predominant in the naphtha molecule. The naphtha is subjected to pre-treatment wherein the Sulphur content is reduced. Then, it is subjected to what is known as a process of reforming in two stages. The first stage is in the primary reformer and the next stage is in the secondary reformer. The process of reforming is nothing but mixing with air and heating. Air contains mainly Nitrogen about 79% and oxygen about 21% and at the end of the secondar....
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.... raw naphtha extended in such case. 2. The Ministry have had the benefit of technical/legal opinion of the Ministry of Petroleum, Chief Chemist, CRCL & the Ministry of Law. It has been stated that the term "by-product" in so far as cracking of naphtha is concerned, is to be understood within the framework as to how a stream is actually used with reference to the Plant design etc. vis-a-vis what it can potentially be used for. The production of gases and liquids other than what is actually used for subsequent transformation in a cracker complex is an inevitable consequence of cracking of naphtha, and the quantum thereof (which varies from the unit to another) may not be of much relevance as such, production is incidental or involuntary. 3. Keeping in view of the above, it is clarified, that when raw naphtha is intended for use in the manufacture of any one or more of the products specified in the Schedule appended to the notification, the production of other goods which are incidental/inevitable/involuntary in such production would not disturb the scheme of exemption and that the whole of the raw naphtha would be deemed to have been used in the manufacture of the product(s) for th....
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....ts specified in the schedule appended to that notification notwithstanding the production of other goods which are incidental/inevitable/involuntary in such production and that, in such cases, the whole of the raw naphtha would be deemed to have been used in the manufacture of product(s) for the manufacture of which raw naphtha was obtained. This clarification was issued by the Ministry after consulting the Chief Chemist, CRCL, the Ministry of Petroleum and the Ministry of Law. 2. It has now been represented that although notification No. 190/75-C.E., dated 30-8-1975 has been incorporated at Sr. No. 3 of notification No. 75/84-C.E., dated 1-3-1984, as amended, certain Central Excise Collectorates are taking a stand that Ministry's F. No. 83/15/72-CX.3, dated 26-3-1976 may not be applicable to Sr. No. 3 of notification No. 75/84-C.E., dated 1-3-1984, as amended, and demands are sought to be raised. 3. The matter has been examined. It is found that notification No. 190/75-C.E., dated 30-8-1975 has been incorporated with all the conditions at Sr. No. 3 of notification No. 75/84-C.E., dated 1-3-1984, as amended. There is, therefore, no reason why instructions contained in Ministry's ....
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....otification exempted all excisable goods on which the duty of excise was leviable and in the manufacture of which any goods falling under Tariff Item 68 (i.e. inputs) had been used from so much of the duty of excise leviable thereon as was equivalent to the duty of excise already paid on the inputs. It is clear, however, that ethylene glycol was used in the manufacture of polyester fibre. It appears that methanol arises as a part and parcel of the chemical reaction during the process of manufacture when ethylene glycol interacts with DMT to produce polyester fibre. It is not possible to use a lesser quantum of the ethylene glycol to prevent methanol from arising for producing a certain quantity of polyester fibre. Thus, the quantity of ethylene glycol required to produce a certain quantum of polyester fibre is determined by the chemical reaction. It may be mentioned herein that it is not as if the appellants have used excess ethylene glycol wantedly to produce the methanol. It is clear that the appellants are not engaged in the production of methanol but in the production of polyester fibre. That position is undisputed. Therefore, it appears that the Tribunal erred when it held tha....