1996 JTR(SC) 1152
1996 AIR(SC) 2542 ; 1996 AIR(SCW) 3159 ; 1996 86 ELT 177 ; 1997 2 GLR 1696 ; 1996 7 JT 44 ; 1996 5 Scale 501 ; 1996 5 SCC 488 ; 1996 Supp4 SCR 183 ; 1996 5 Supreme 689
1996(5) Supreme 689
SUPREME COURT OF INDIA
S.P. Bharucha and K.T. Thomas, JJ.
Indian Farmers Fertilizer Cooperative Ltd. -Appellant
versus
Collector of Central Excise, Ahmedabad -Respondent
Civil Appeal No. 5437 of 1990 Etc.
Decided on 31-7-1996
Counsels for the Parties :
For the Appellants : H.N. Salve, Sr. Advocate and K.J. John, Advocate.
For the Respondents : Joseph Vellapally, Sr. Advocate, A.D.N. Rao and P. Parmeswaran, Advocates.
IMPORTANT POINTS
1. Raw Naptha used to produce ammonia which is used in the water treatment, steam generation, inert gas generation and effluent treatment plants of the urea plant is entitled to the exemption provided by the Exemption Notification No. 187/61, issued under the provisions of Rule 8 of the Central Excise Rules.
2. The apparatus used for treatment of effluents in a plant manufacturing a particular end product is part and parcel of the manufacturing process of that end product.
Act
Referred
:CENTRAL EXCISE ACT : S.5(a)
CENTRAL EXCISE AND SALT ACT : Sch.i Item.6
CENTRAL EXCISE RULES : R.8(1), R.8
A) The Central Excise Act, read with Rule 8 of the Central Excise Rules read in relation to Schedule-I Item 6 of the Central Excise and Salt Act, provides for exemption from excise duty on raw naptha used in the manufacture of ammonia, where such ammonia is used elsewhere in the manufacture of fertilisers. In the present appeals, this exemption notification was interpreted to cover not only ammonia used directly in the urea plant but also ammonia used in integral auxiliary off-site plants such as water treatment, steam generation, inert gas generation, and even effluent treatment, so long as the overall process culminates in the manufacture of urea, a fertiliser. The Tribunal relied on the principle that excise exemptions must be given their liberal and natural meaning to achieve the legislative intent of promoting manufacturing efficiency and pollution control.
B) Key legal principles include: (i) exemption from excise is available where raw material is used in the manufacture of a product and the product (ammonia) is used elsewhere in the manufacture of the final fertiliser; (ii) the phrase 'used elsewhere in the manufacture of fertilisers' is not restricted to direct use in the main plant but extends to integral and ancillary processes forming part of the composite manufacturing chain; (iii) processes essential for the maintenance, testing, commissioning, water purification, corrosion prevention, and effluent treatment that are inseparable from the manufacture of the final product fall within 'manufacture' for exemption purposes; (iv) the doctrine of harmonious construction and liberal interpretation applies to exemption notifications; and (v) treatment of effluents is an essential and integral part of the modern manufacturing process and attracts exemption where it forms part of the production cycle.
Facts of the case:
The appellants manufacture urea, a fertiliser, at a plant in Gujarat using raw naptha obtained under an exemption notification (No. 187/61) at a concessional rate of duty. The raw naptha is used to produce ammonia, which is employed directly in the urea plant and also in off-site plants including water treatment, steam generation, inert gas generation, and effluent treatment. The appellants were issued show-cause notices contending that ammonia used in the water treatment, steam generation, inert gas generation, and effluent treatment plants was not eligible for exemption. The Collector allowed exemption for the former three plants but denied it for the effluent treatment plant. The Authority reversed the Collector, holding that ammonia in all these plants was used in the manufacture of fertilisers, a decision challenged by the excise authorities.
Findings of Court:
The Tribunal held that the water treatment, steam generation, and inert gas generation plants are integral parts of the composite process of manufacturing urea, and the ammonia used therein qualifies as being used in the manufacture of fertilisers. The Court further held that the effluent treatment plant, being an essential and inseparable part of the modern manufacturing process aimed at pollution control and environmental protection, is also part of the manufacturing process, making the ammonia used therein eligible for exemption. The Court relied on prior precedents emphasising that processes which are indispensable to the commercial production of goods fall within the scope of 'in the manufacture of goods'.
Issues:
i) Whether ammonia used in water treatment, steam generation, and inert gas generation plants falls within the exemption clause requiring that it be used 'elsewhere in the manufacture of fertilisers'? (ii) Whether the effluent treatment process is an integral part of the manufacturing process of urea so that ammonia used therein is exempt? (iii) How should the exemption notification be interpretednarrowly or liberallyso as to align with statutory intent and environmental imperatives?
Ratio Decidendi:
The exemption notification must be liberally construed to give effect to the legislative purpose of fostering efficient and environmentally sound manufacturing. Processes that are integral and ancillary to the production of the final fertiliser product, including pollution control and effluent treatment, form part of 'manufacture' within the meaning of the notification. Therefore, raw naptha used to produce ammonia that is employed in such integral off-site and effluent treatment plants is entitled to the exemption.
Result:
The appeals are allowed. The orders of the Authority setting aside the demand in respect of the off-site plants and the effluent treatment plant are restored. Raw naptha used to produce ammonia utilised in the water treatment, steam generation, inert gas generation, and effluent treatment plants of the urea manufacturing process is held to be eligible for the exemption provided under Exemption Notification No. 187/61.
A) The Central Excise Act, read with Rule 8 of the Central Excise Rules read in relation to Schedule-I Item 6 of the Central Excise and Salt Act, provides for exemption from excise duty on raw naptha used in the manufacture of ammonia, where such ammonia is used elsewhere in the manufacture of fertilisers. In the present appeals, this exemption notification was interpreted to cover not only ammonia used directly in the urea plant but also ammonia used in integral auxiliary off-site plants such as water treatment, steam generation, inert gas generation, and even effluent treatment, so long as the overall process culminates in the manufacture of urea, a fertiliser. The Tribunal relied on the principle that excise exemptions must be given their liberal and natural meaning to achieve the legislative intent of promoting manufacturing efficiency and pollution control.
B) Key legal principles include: (i) exemption from excise is available where raw material is used in the manufacture of a product and the product (ammonia) is used elsewhere in the manufacture of the final fertiliser; (ii) the phrase 'used elsewhere in the manufacture of fertilisers' is not restricted to direct use in the main plant but extends to integral and ancillary processes forming part of the composite manufacturing chain; (iii) processes essential for the maintenance, testing, commissioning, water purification, corrosion prevention, and effluent treatment that are inseparable from the manufacture of the final product fall within 'manufacture' for exemption purposes; (iv) the doctrine of harmonious construction and liberal interpretation applies to exemption notifications; and (v) treatment of effluents is an essential and integral part of the modern manufacturing process and attracts exemption where it forms part of the production cycle.
Facts of the case:
The appellants manufacture urea, a fertiliser, at a plant in Gujarat using raw naptha obtained under an exemption notification (No. 187/61) at a concessional rate of duty. The raw naptha is used to produce ammonia, which is employed directly in the urea plant and also in off-site plants including water treatment, steam generation, inert gas generation, and effluent treatment. The appellants were issued show-cause notices contending that ammonia used in the water treatment, steam generation, inert gas generation, and effluent treatment plants was not eligible for exemption. The Collector allowed exemption for the former three plants but denied it for the effluent treatment plant. The Authority reversed the Collector, holding that ammonia in all these plants was used in the manufacture of fertilisers, a decision challenged by the excise authorities.
Findings of Court:
The Tribunal held that the water treatment, steam generation, and inert gas generation plants are integral parts of the composite process of manufacturing urea, and the ammonia used therein qualifies as being used in the manufacture of fertilisers. The Court further held that the effluent treatment plant, being an essential and inseparable part of the modern manufacturing process aimed at pollution control and environmental protection, is also part of the manufacturing process, making the ammonia used therein eligible for exemption. The Court relied on prior precedents emphasising that processes which are indispensable to the commercial production of goods fall within the scope of 'in the manufacture of goods'.
Issues:
i) Whether ammonia used in water treatment, steam generation, and inert gas generation plants falls within the exemption clause requiring that it be used 'elsewhere in the manufacture of fertilisers'? (ii) Whether the effluent treatment process is an integral part of the manufacturing process of urea so that ammonia used therein is exempt? (iii) How should the exemption notification be interpretednarrowly or liberallyso as to align with statutory intent and environmental imperatives?
Ratio Decidendi:
The exemption notification must be liberally construed to give effect to the legislative purpose of fostering efficient and environmentally sound manufacturing. Processes that are integral and ancillary to the production of the final fertiliser product, including pollution control and effluent treatment, form part of 'manufacture' within the meaning of the notification. Therefore, raw naptha used to produce ammonia that is employed in such integral off-site and effluent treatment plants is entitled to the exemption.
Result:
The appeals are allowed. The orders of the Authority setting aside the demand in respect of the off-site plants and the effluent treatment plant are restored. Raw naptha used to produce ammonia utilised in the water treatment, steam generation, inert gas generation, and effluent treatment plants of the urea manufacturing process is held to be eligible for the exemption provided under Exemption Notification No. 187/61.
JUDGMENT
Bharucha, J.-These are appeals against orders of the Customs, Excise and Gold Control Appellate Tribunal, New Delhi.
2. These periods involved in the appeals are : 1st April, 1974 to 31st December, 1982 in Civil Appeal No. 5437 of 1990 and January 1983 to April, 1984 in Civil Appeal Nos. 5941-43 of 1990.
3. By an Exemption Notification (No. 187/61) issued under the provisions of Rule 8 of the Central Excise Rules, the Central Government exempted raw naptha falling under Item No. 6 of the First Schedule to the Central Excise and Salt Act, 1944, from the payment of excise duty in excess of Rs. 4.36 per kilolitre at 15 degree Centigrade. The Exemption Notification applied "in respect of such Raw Naptha as is used in the manufacture of Ammonia provided such Ammonia is used elsewhere in the manufacture of fertilisers" and the procedure set out in Chapter-X of the said Rules was followed.
4. The appellants manufacture urea, which is a fertiliser, at a plant at Kalol in the State of Gujarat and utilise for the purpose raw naptha. The raw naptha was obtained at the concessional rate of duty and was used for producing ammonia which, in turn, was used, partly, directly in the urea plant and, partly, indirectly, in the submission of the appellants, in the production of urea by being employed in off-site plants, namely, the water treatment plant, steam generation plant, inert gas generation plant and effluent treatment plant, all of which were part of the integral process of the manufacture of urea.
5. The appellants, however, received show cause notices for the periods aforementioned demanding excise duty at full rate on the raw naptha used for making ammonia had been used in the water treatment plant, steam generation plant, inert gas generation plant, and effluent treatment plant on the ground that such raw naptha was not used in the manufacture of fertilisers. The demand was confirmed. In appeal by the appellants, the Collector of Central Excise and Customs upheld the contention of the appellants insofar as the ammonia was used in the water treatment plant, steam generation plant and inert gas generation plant. This was on the basis that the inert gas generated in the inert gas generation plant was required for purging the pipelines and other process equipment of the ammonia plant every time it had to be started or shut and, therefore, the process of inert gas generation had to be treated as an integral part of the process of the manufacture of ammonia, which, in turn, was used for the manufacture of fertilisers. The appellants required water of a high degree of purity in the high pressure boilers and heat exchangers in the ammonia and urea plants. Ammonia was used therein for purifying the water. The use of ammonia in the water treatment and steam generation plants was, therefore, also an integral part of the process of manufacture of fertilisers. Insofar as the effluent treatment plant was concerned, however, the Collector took the view that effluents were waste produced after the fertilisers had been manufactured. The effluents were treated for reasons of hygiene and pollution. Their treatment could not be said to be directly linked to the process of manufacture of fertilisers and the effluent treatment plant could not be said to be an integral part of the process of manufacture of fertilisers. The demand upon the appellants, insofar as it related to the effluent treatment plant, was, therefore, upheld.
6. The excise authorities and the appellants filed appeals before the Tribunal. The Tribunal reversed the decision of the Collector in so far as it held that the off-site plants, other than the effluent treatment plant, were a part of the process of manufacture of fertilisers. The Tribunal held that ammonia was used for the maintenance of the plant and equipment meant for testing and commissioning the plant and could not be said to be utilised in manufacture. Similarly, the purpose of the water treatment being essential for the protection of the boiler and other process equipment from corrosion, formation of scales, etc., the ammonia used for the purpose could not be said to be used in the manufacture of fertilisers. The view of the Collector, in so far as the effluent treatment plant was concerned, was upheld.
7. Emphasis was laid, and rightly, by learned counsel for the appellants on the phraseology used in the Exemption Notification. The exemption is made available to such raw naptha as is used in the manufacture of ammonia provided such ammonia is used elsewhere in the manufacture of fertilisers. That the raw naptha is used to make ammonia is unquestioned. The ammonia is used directly in the manufacture of fertilisers; the raw naptha so used is, it is not disputed, eligible to the exemption. The question is whether the ammonia used in the off-site plants is also ammonia which is "used elsewhere in the manufacture of fertilisers". The water treatment, steam generation and inert gas generation plants are part and parcel of the composite process that produces as its end product urea, which is a fertiliser. These off-site plants are part of the process of the manufacture of urea. There is no good reason why the exemption should be limited to the raw naptha used for producing ammonia that is utilised directly in the urea plant. The Exemption Notification does not require that the ammonia should be used directly in the manufacture of fertilisers. It requires only that the ammonia should be used in the manufacture of fertilisers. The Exemption Notification must be so construed as to give due weight to the liberal language it uses. The ammonia used in the water treatment, steam generation and inert gas generation plants, which are a necessary part of the process of manufacturing urea, must, therefore, be held to be used in the manufacture of ammonia and the raw naptha used for the manufacture thereof is entitled to the duty exemption.
8. For our conclusion we draw support from the judgment of this Court in Collector of Central Excise, Calcutta-II v. M/s. Eastend Paper Industries Ltd. , where it was held, "Where any particular process.....is so integrally connected with the ultimate production of goods that, but for that process, manufacture or processing of goods would be commercially inexpedient, articles required in that process, would fall within the expression in the manufacture of goods ". This was a reiteration of the view expressed in M/s. J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Sales Tax Officer, Kanpur and Another.2 It was there held, "the expression "in the manufacture" takes in within its compass, all processes which are directly related to the actual production". In Collector of Central Excise, New Delhi v. M/s. Ballarpur Industries Ltd.3, the respondent manufactured paper and paperboard, "in the processes relating to which "sodium sulphate" is used in the chemical recovery cycle of sodium sulphate which forms an essential constituent of sulphate cooking liquor used in the digestion operation". The Exemption Notification concerned provided exemption to goods which had used as raw material or component parts any goods (inputs) falling under Item 68 of the First Schedule to the Act from so much of the excise duty leviable thereon as was equivalent to the excise duty paid on the inputs. The Court quoted what had been said in Dy. CST v. Thomas Stephen & Co. Ltd., namely, "Consumption must be in the manufacture as raw material or of other components which go into the making of the end product....." and observed that, correctly apprehended, that statement, did not lend itself to the understanding that for something to qualify itself as a raw material is had necessarily and in all cases to go into and be found in the end product. The Court also quoted with approval the case of Eastend Paper Industries Limited cited above.
9. That leaves us to consider whether the raw naptha used to produce the ammonia which is used in the effluent treatment plant is eligible for the said exemption. It is too late in the day to take the view that the treatment of effluents from a plant is not an essential and integral part of the process of manufacture in the plant. The emphasis that has rightly been laid in recent years upon the environment and pollution control requires that all plants which emit effluents shouldd be so equipped as to rid the effluents of dangerous properties. The apparatus used for such treatment of effluents in a plant manfucturing a particular end product is part and parcel of the manufacturing process of that end product. The ammonia used in the treatment of effluents from the urea plant of the appellants has, therefore, to be held to be used in the manufacture of urea and the raw naptha used in the manufacture of such ammonia to be entitled to the said exemption.
10. In the result, the appeals are allowed. The orders under appeal are set aside. It is held that the raw naptha used to produce ammonia which is used in the water treatment, steam generation, inert gas generation and effluent treatment plants of the urea plant of the appallants is entitled to the exemption provided by the Exemption Notification No. 187/61 as amended from time to time.
11. There shall be no order as to costs.
Appeals Allowed.
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