1996 JTR(SC) 1140
1996 AIR(SC) 2544 ; 1996 AIR(SCW) 3162 ; 1996 88 ELT 314 ; 1997 91 ELT 529 ; 1996 9 JT 113 ; 1996 5 Scale 479 ; 1996 5 SCC 484 ; 1996 SCR 163 ; 1996 KHC 919 ; 1996 5 Supreme 669
1996(5) Supreme 669
SUPREME COURT OF INDIA
S.P. Bharucha and K.T. Thomas, JJ.
M/s. Steel Authority of India Ltd. etc. -Appellants
versus
Collector of Central Excise -Respondent
Civil Appeal No. 3406-11 of 1990 etc.
Decided on 30-7-1996
Counsel for the Parties :
For the Appellants : V. Sreedharan, Sunil Kumar Jain, Jatinder K. Bhatia, Sanjeev Bansal and K.J. John, Advocates.
For the Respondent : Joseph Vellappally, Sr. Advocate, R. P. Srivastava, P. Parmeswaran and V.K. Verma, Advocates.
Act Referred :CENTRAL EXCISE RULES : R.196, R.192
A) The Central Excise Rules, Rule 192 and Rule 196 govern the concession of excise duty on raw naphtha used in the manufacture of fertiliser. Rule 192 allows concessional duty subject to conditions, while Rule 196 provides that where excisable goods obtained under Rule 192 are not accounted for as used for the specified purpose, full duty is payable on demand unless lost or destroyed. These provisions directly apply to the determination of whether the raw naphtha utilised by the assessee attracted concessional rates or full duty.
B) The key legal principles include that the exemption under the notification is contingent upon the substance being used for the intended purpose, and the emphasis is on the intention and purpose of use rather than actual completion of the manufacturing process. The doctrine of liberal interpretation applies to statutory notifications aimed at reducing input costs for essential commodities, and the requirement of actual use is not attracted where the material is necessarily deployed in a preparatory or trial phase due to operational compulsions.
Facts of the case:
SAIL operated a fertiliser plant at Rourkela using raw naphtha, which was excisable at a concessional rate under an exemption notification dated 23rd December, 1961, on conditions that it was intended for manufacturing fertiliser and the procedure under Chapter X of the Central Excise Rules, 1944 was followed. The Revenue contended that a substantial quantity was not used for manufacturing fertiliser as it was vented out during pre-commissioning and trial runs due to power shortages. The Tribunal initially held that the material was not used for the exempted purpose, but later, upon reconsideration, held that the concessional input was used for the manufacture of fertiliser within the meaning of the notification, as the venting was an unavoidable technological necessity.
Findings of Court:
The Court found that the raw naphtha was indeed used for the purpose of manufacturing fertiliser with the requisite intention, and the inability to produce fertiliser due to power constraints did not negate this purpose. The Tribunal was correct in aligning with the principle that materials used during pre-commissioning and trial runs, necessitated by operational realities, fall within the scope of the exemption notification when the ultimate objective is the manufacture of the exempted product.
Issues:
Whether raw naphtha vented during pre-commissioning and trial runs due to power shortages could be considered as used for the manufacture of fertiliser within the meaning of the exemption notification, and whether Rule 196 mandating full duty on non-accounted goods is attracted when the non-use is due to supervening operational causes beyond the control of the assessee.
Ratio Decidendi:
The exemption notification must be interpreted liberally to achieve its object of reducing input costs, and the condition of intended use requires that the raw material be deployed for the exempted purpose, irrespective of whether the final product is ultimately realised, provided the deviation is caused by unavoidable technological necessities and not misuse.
Result:
The appeals are allowed, the judgments and orders of the Tribunal under appeal are set aside, and the claims of SAIL against the demand for excise duty on the contested quantity of raw naphtha are upheld.
A) The Central Excise Rules, Rule 192 and Rule 196 govern the concession of excise duty on raw naphtha used in the manufacture of fertiliser. Rule 192 allows concessional duty subject to conditions, while Rule 196 provides that where excisable goods obtained under Rule 192 are not accounted for as used for the specified purpose, full duty is payable on demand unless lost or destroyed. These provisions directly apply to the determination of whether the raw naphtha utilised by the assessee attracted concessional rates or full duty.
B) The key legal principles include that the exemption under the notification is contingent upon the substance being used for the intended purpose, and the emphasis is on the intention and purpose of use rather than actual completion of the manufacturing process. The doctrine of liberal interpretation applies to statutory notifications aimed at reducing input costs for essential commodities, and the requirement of actual use is not attracted where the material is necessarily deployed in a preparatory or trial phase due to operational compulsions.
Facts of the case:
SAIL operated a fertiliser plant at Rourkela using raw naphtha, which was excisable at a concessional rate under an exemption notification dated 23rd December, 1961, on conditions that it was intended for manufacturing fertiliser and the procedure under Chapter X of the Central Excise Rules, 1944 was followed. The Revenue contended that a substantial quantity was not used for manufacturing fertiliser as it was vented out during pre-commissioning and trial runs due to power shortages. The Tribunal initially held that the material was not used for the exempted purpose, but later, upon reconsideration, held that the concessional input was used for the manufacture of fertiliser within the meaning of the notification, as the venting was an unavoidable technological necessity.
Findings of Court:
The Court found that the raw naphtha was indeed used for the purpose of manufacturing fertiliser with the requisite intention, and the inability to produce fertiliser due to power constraints did not negate this purpose. The Tribunal was correct in aligning with the principle that materials used during pre-commissioning and trial runs, necessitated by operational realities, fall within the scope of the exemption notification when the ultimate objective is the manufacture of the exempted product.
Issues:
Whether raw naphtha vented during pre-commissioning and trial runs due to power shortages could be considered as used for the manufacture of fertiliser within the meaning of the exemption notification, and whether Rule 196 mandating full duty on non-accounted goods is attracted when the non-use is due to supervening operational causes beyond the control of the assessee.
Ratio Decidendi:
The exemption notification must be interpreted liberally to achieve its object of reducing input costs, and the condition of intended use requires that the raw material be deployed for the exempted purpose, irrespective of whether the final product is ultimately realised, provided the deviation is caused by unavoidable technological necessities and not misuse.
Result:
The appeals are allowed, the judgments and orders of the Tribunal under appeal are set aside, and the claims of SAIL against the demand for excise duty on the contested quantity of raw naphtha are upheld.
JUDGMENT
Bharucha, J.-These are appeals against orders of the Customs, Excise & Gold (Control) Appellate Tribunal dismissing appeals filed by the present appellants, Steel Authority of India Ltd. (SAIL), before it.
2. SAIL has a plant at Rourkela which manufactures fertilisers. For such purpose SAIL uses raw naphtha. Raw naphtha was, at the relevant time, excisable at a concessional rate of duty in terms of an exemption notification (No. 187 of 61) dated 23rd December, 1961, as amended from time to time. The concessional rate of duty stated therein was admissible provided -
"(i) it is proved to the satisfaction of an officer not below the rank of an Assistant Collector of Central Excise that such raw naphtha is intended for use in the manufacture of fertiliser; and
(ii) the procedure set out in Chapter X of the Central Excise Rules, 1944 is followed."
It was the case of the Revenue that a substantial quantity of raw naphtha was not, in fact, used by SAIL in the manufacture of fertiliser. SAIL was, therefore, served with show cause notices demanding amounts of excise duty on quantities of raw naphtha allegedly not utilised for the manufacture of fertiliser. SAIL s explanation in that behalf, in the words of an Assistant Collector, read:
"The assessee contended that the consumption of raw naphtha was more due to abnormal operating conditions such as low load operation, interruption in the plant operations due to low, uncertain and fluctuating availability of power. It was stated that the consumption of naphtha was further high because gases produced (out of raw naphtha) had to be vented due to acute power crisis causing interruption/stoppages of down stream units of the plant. It was submitted that the two naphtha reforming plants have provisions in the system for automatic venting of gases, in the event gas formed cannot travel forward due to non-availability of power for operating the down stream plants, and excessive pressure build up. On many occasions gases are required to be vented out from the naphtha reforming plant when the said gases cannot be sent to down stream plants due to non-availability and low, interrupted and uncertain power supply or any other operational or maintenance problems in the plant. Moreover, the naphtha reforming plants have to be kept not for preventing damages to the equipments, Reformer furnaces and catalysts in particular. Under the circumstances, of severe power shortages/restriction there was no production of Ammonia on many days. However, considering the safety of the equipments and life of refractory furnaces and catalysts of the plant, naphtha had to be consumed on those days, when there was no production of Ammonia. Naphtha consumed for the gases vented out during those days when there was no production of Ammonia, was essential for keeping the naphtha reforming plant in operational fitness and safe condition so that the plant could be lined up for production of Ammonia and fertiliser at any time in the subsequent period depending on power availability."
3. The matter first came before the Tribunal in relation to an order passed by the Collector of Central Excise (Appeals), Calcutta, on 17th September, 1987. The Tribunal then placed reliance upon Rule 196(1) of the Central Excise Rules, which stated, "If any excisable goods obtained under rule 192 are not duly accounted for as having been used for the purpose and in the manner stated in the application .......... the applicant shall, on demand by the proper officer, immediately pay the duty leviable on such goods." An exception was made in the said Rule in the case of excisable goods which were shown to the satisfaction of the proper officer to have been lost or destroyed by natural causes or unavoidable accident during transport. The Tribunal noted that it was not the case of SAIL that the concerned quantity of raw naphtha had been lost or destroyed. It had, in fact, been burnt in the naphtha reforming plant of SAIL for keeping it continuously running so that the ammonia plant could be switched on immediately upon resumption of power supply. The gas produced by burning the concerned raw naphtha did not reach the ammonia plant as the reformed gas was vented into the atmosphere. This quantity of raw naphtha could not, in the Tribunal s view, be said to have been used for the manufacture of fertiliser. The provisions of Rule 196 of the Central Excise Rules require that excise duty at full rate should be paid on demand in respect of such raw naphtha as was found not to have been actually used in the manufacture of fertiliser. The quantity of raw naphtha in dispute did not satisfy both the conditions prescribed in the exemption notification and, as such, the concessional rate of excise duty was not available to it. The order of the Collector dated 17th September, 1967, was, therefore, upheld.
4. In the second order of the Tribunal, which arose upon an order passed by the Collector on 22nd September, 1989, the earlier order aforementioned was followed; but it was followed only because, as expressly stated, judicial propriety and discipline so required. The view expressed by the Tribunal in the second order was contrary to that expressed in the first order. The second order noted that there was no dispute that the raw naphtha, when it was procured by SAIL, was intended for use in the manufacture of fertiliser but, for operational reasons, it became necessary for SAIL to vent out the reformed gas produced out of the raw naphtha concerned before it could be fed into the ammonia plant in the stream of production of fertiliser. The stand of SAIL that in the then prevailing circumstances this venting of reformed gas was an unavoidable technological necessity had not been denied by the Revenue. The Tribunal noted that it had had occasion to deal with cases where fertiliser plants, before being commissioned, had necessarily to be put through pre-commissioning trial runs and it had been held that, though the use of concessional inputs did not result in the production of fertiliser, such inputs should be deemed to have been used in the manufacture of fertiliser. The Ministry of Finance had, in a circular dated 2nd July, 1974, also made it clear to Excise Collectors that naphtha used during trial runs and commissioning of fertiliser plants was eligible for the excise duty concession. In the view of the Tribunal in the second order, the principle would apply. It said :
"If venting out the reformed gas, produced out of the concessional rated naphtha was a technological necessity when the fertiliser plant itself could not be operated due to lack of adequate power supply - and, there is no dispute on this - we do not see why such use of naphtha cannot be termed to be use in the manufacture of fertiliser though no fertiliser was, in fact, produced. There is no allegation that this naphtha was misused or utilised in production of something for which exemption was not provided. We feel that the subject notifications should be interpreted in a liberal spirit, looking to the object of the notification viz., reducing the cost of inputs for fertilisers, as indeed the Tribunal did when it held that use of naphtha is pre-commission trials, not resulting in production of fertiliser would be eligible for the benefit of the relevant notifications."
5. In our opinion, the Tribunal was right when it expressed its dis-agreement in the second order with the view taken in the first order.
6. It is important to note that the exemption notification required proof that the raw naphtha was "intended for use" in the manufacture of fertiliser and not that the raw naphtha was used in the manufacture of fertiliser. Due emphasis has to be given to the clear language of the first condition of the exemption notification and its effect cannot be nullified by an interpretation placed on the second condition. Both conditions must be so read as to give full effect to the clear language of the first condition. The emphasis in this behalf upon Rule 196 in the first order of the Tribunal appears to us misplaced. Rule 196 says that if any excisable goods obtained under Rule 192 are not accounted for as having been used for the purpose and in the manner required, full excise duty thereon is payable. It does not appear to be correct to hold, as the Tribunal did in the first order, that this meant that it was requisite that it should be proved that the raw naphtha had been actually used in the manufacture of fertiliser. In the context, what was required to be shown was that the raw naphtha was used for the purpose and with the intention of manufacturing fertiliser. Duty at the full rate on the raw naphtha would be leviable only if it could not be shown to have been used for the purpose and with the intention of manufacturing fertiliser.
7. There can be no doubt that the raw naphtha that was fed by SAIL into its plant was for the purpose and with the intention of manufacturing fertiliser and that it was only because of supervening circumstances, namely, the low, uncertain and fluctuating availability of power, that the reformed gas produced during the interim stage of manufacture had to be vented out. The benefit of the exemption notification is, therefore, available to SAIL in regard to the raw naphtha that it utilised in its plant for the manufacture of fertiliser but which, for reasons over which it had no control, did not, in fact, result in the manufacture of fertiliser but had, at the interim stage of reformed gas, to be vented out.
8. In the result, the appeals are allowed and the judgments and orders of the Tribunal under appeal are set aside. The appeals filed by the appellant, SAIL, before the Tribunal against the orders of the Collector of Central Excise (Appeals), Calcutta, are allowed.
9. There shall be no order as to costs.
Appeals allowed. Judgments & Orders of Tribunal set aside.
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Parallel Citations of other Journnals :
M/s. Steel Authority of India Ltd. etc. v. Collector of Central Excise, 1996(5) Supreme 669 : 1996(5) SCC 484 : AIR 1996 SC 2544
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