Rashtriya Chemicals vs. Commissioner of Central Excise - Duty and Penalty Appeal

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M/S Rashtriya Chem. And Fer. Ltd vs Comm. Of Central Ex. And Serv. Tax(Ltu) on 24 March, 2026

2026 INSC 285
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

                                  CIVIL APPEAL NOS. 2219-20 OF 2013

                        M/S. RASHTRIYA CHEMICALS AND
                        FERTILIZERS LIMITED                        APPELLANT(S)

                                                 VERSUS

                        COMMISSIONER OF CENTRAL EXCISE
                        AND SERVICE TAX (LTU)         RESPONDENT(S)

                                                  WITH

                                    CIVIL APPEAL NO.         OF 2026
                             (ARISING OUT OF SLP (CIVIL) NO. 21441 OF 2013)

                                             JUDGMENT UJJAL BHUYAN, J.

Leave granted in Special Leave Petition (Civil)

                        No. 21441 of 2013.

1.      The subject matter in the three civil appeals
   
                       being inter-connected, those were heard together and are
   
                       hereby disposed of by this common judgment and order. Signature Not Verified Digitally signed by RADHA SHARMA Date: 2026.03.24 17:21:07 IST
   

2.      Civil Appeal No. 2219 of 2013 arises out of the Reason: order dated 27.03.2012 passed by the Customs Excise and
   

   Service Tax Appellate Tribunal, West Zonal Bench, Mumbai

(CESTAT) in Appeal No. E/671/10-Mum whereas Civil

Appeal No. 2220 of 2013 is preferred against the same final

order dated 27.03.2012 passed by the CESTAT in Appeal

No. E/801/10-Mum.

3.1. It may be mentioned that Appeal No. E/671/10-

Mum was filed before the CESTAT against the order-in-

original dated 27.01.2010 passed by the Commissioner of

Central Excise and Service Tax as the original adjudicating

authority. On the other hand, Appeal No. E/801/10-Mum

was filed before the CESTAT against the order-in-original

dated 04.02.2010 passed by the aforesaid Commissioner.

By the common order dated 27.03.2012, both the appeals

were disposed of by the CESTAT affirming the levy of duty

qua the two orders-in-original. CESTAT also upheld the

penalty imposed by the adjudicating authority under Section 11AC of the Central Excise Act, 1944 but set aside

the penalties imposed under Rule 173Q of the Central

Excise Rules, 1944 and under Rule 25 of the Central Excise

Rules, 2002.

2

1. Aggrieved thereby, the two appeals came to be

filed. This Court vide the order dated 04.03.2013, admitted

the appeals but declined the prayer for stay.

1. Civil Appeal No. _____ of 2026 (arising out of

Special Leave Petition (Civil) No. 21441 of 2013) has been

preferred against the final order dated 21.02.2013 passed

by the High Court of Judicature at Bombay (briefly ‘the High

Court’ hereinafter) in Central Excise Appeal No. 129 of 2012

(M/s. [Rashtriya Chemicals and Fertilizers Limited Vs. Union

of India](https://indiankanoon.org/doc/1483408/)). The aforesaid appeal was filed assailing an order

dated 16.07.2012 passed by the CESTAT on an application

filed by the appellant for rectification of the order dated

27.03.2012. Rectification was sought for on the ground that

issues raised in the memo of appeal were not considered by

the CESTAT. CESTAT had rejected the application filed by

the appellant stating that those grounds were not argued

during the hearing; it had considered only those grounds

which were argued. By the impugned order, High Court did

not find any merit in the said appeal and dismissed the

same.

3 Facts

1. On 13.02.2001, officers belonging to the Central

Excise Department visited the premises of the appellant

and scrutinized the record. It was observed that

appellant was procuring Naphtha at nil rate of duty

from Hindustan Petroleum Corporation Limited (HPCL)

by claiming benefit of exemption under notification

Nos. 75/84-CE dated 01.03.1984 and 4/97-CE dated

01.03.1997, as amended, for ‘intended use’ in the

manufacture of fertilizer. It was further observed that the

said Naphtha was also used alongwith the natural gas as

fuel for generation of steam in the steam generation plant.

1. Thereafter, the revenue issued show cause

notice dated 29.08.2001 to the appellant demanding duty

amounting to Rs. 28,55,95,491.00 for the period from

November, 1996 to March, 2001 by alleging that Naphtha

procured by the appellant was being used not only in the

manufacture of fertilizer but also in the manufacture of

other chemicals; thus rendering the appellant ineligible for

nil rate of duty under the aforesaid notifications. 4

1. Appellant submitted reply to the aforesaid show

cause notice on 02.11.2001 denying the allegation made by

the revenue. It was contended by the appellant that

Naphtha was being utilized for its intended purpose and not

diverted as alleged.

1. Following adjudication proceedings, the demand

of duty amounting to Rs. 28,55,95,491.00 was confirmed by

the Commissioner of Central Excise vide the order-in-

original dated 04.02.2002.

1. This was followed by issuance of eight show

cause notices by the revenue to the appellant on the same

issue covering the period from April, 2001 to November,

2001.

1. Appellant preferred appeal before the CESTAT

against the order-in-original dated 04.02.2002. On the stay

application, an amount of Rs. 2 crores against the demand

of Rs. 28.56 crores i.e. approximately 10 percent amount

was ordered to be pre-deposited vide the order dated

17.01.2003.

1. While the appeal was pending, fourteen more

show cause notices were issued by the department to the 5 appellant on the same issue but covering the period from

December, 2001 to January, 2003. It is stated that

appellant had submitted a reply dated 30.04.2003 to one of

the show cause notices dated 31.03.2003.

1. Appeal filed by the appellant was disposed of by

the CESTAT vide the order dated 14.01.2004 remanding the

matter back to the original adjudicating authority for a

fresh consideration on merit as well as on quantum.

1. Notwithstanding the order of remand, three

more show cause notices came to be issued by the revenue

to the appellant covering the period from February, 2003 to

February, 2005.

1. The original adjudicating authority conducted

de novo adjudication in the remanded matter. This time the

adjudicating authority not only adjudicated the first show

cause notice dated 29.08.2001 but also adjudicated the

subsequent twenty five show cause notices issued covering

the period from April, 2001 to February, 2005.

1. The original adjudicating authority confirmed

the demand of duty amounting to Rs. 9,66,38,054.00 on

the appellant vide the order-in-original dated 28.02.2006. 6

1. Appellant preferred an appeal before the

CESTAT against the order-in-original dated 28.02.2006.

Vide the order dated 10.11.2006, CESTAT waived the

condition for pre-deposit but remanded the matter back to

the original adjudicating authority to afford an opportunity

to the appellant to make its submissions on merit as well

as on computation of duty and thereafter to decide the

matter afresh.

1. In the personal hearing granted to the appellant

by the original adjudicating authority, it was submitted on

behalf of the appellant that Naphtha was in short supply

which was an admitted fact. This short fall was bridged by

natural gas; both were used as fuel to generate the required

quantum of steam to manufacture fertilizer. It was contended

that when Naphtha was itself in short supply, it could not have

been diverted for the manufacture of other chemicals, as

alleged.

1. The original adjudicating authority issued two

separate orders: (i) order-in-original dated 27.01.2010 in

respect of the show cause notice dated 29.08.2001; and (ii)

order-in-original dated 04.02.2010 for the remaining 7 twenty five show cause notices. By the aforesaid orders, the

original adjudicating authority rejected the contention of

the appellant and affirmed the levy of duty and penalty.

1. Aggrieved by the order-in-original dated

27.01.2010, appellant preferred Appeal No. E/671/10-

Mum before the CESTAT alongwith a stay application.

However, CESTAT directed pre-deposit of Rs. 2 crores.

1. Appellant also filed another appeal being Appeal

No. E/801/10-Mum alongwith a stay application before

the CESTAT against the second order-in-original dated 04.02.2010.

1. Against the decision of the CESTAT directing

the appellant to pre-deposit Rs.2 crores, appellant preferred

an appeal before the High Court which was registered as

Central Excise Appeal No. 68/2011. High Court allowed the

aforesaid appeal vide the order dated 28.06.2011 and

waived the condition of pre-deposit against execution of

bond for the amount of duty and directed CESTAT to hear

the appeal on merit.

1. CESTAT heard both the appeals i.e. Appeal No.

E/671/10-Mum and Appeal No. E/801/10-Mum and

thereafter pronounced the impugned final order dated 8 27.03.2012 partially allowing the appeals filed by the

appellant by confirming the duty demanded alongwith

interest and also upholding the imposition of penalty under Section 11AC of the Central Excise Act, 1944 but dropped

the penalty imposed under Rule 173Q of the Central Excise

Rules, 1944 and under Rule 25 of the Central Excise Rules,

2002.

1. Aggrieved thereby, appellant has preferred the

two civil appeals being Civil Appeal Nos. 2219 of 2013 and

2220 of 2013.

1. In the meanwhile, an application was filed by

the appellant before the CESTAT for rectification of the

order dated 27.03.2012 under Section 35C(2) of the Central

Excise Act, 1944. However, the same was rejected by the

CESTAT vide the order dated 16.07.2012. Against such

rejection, appellant preferred Central Excise Appeal No. 129

of 2012 before the High Court. Vide the order dated

21.02.2013, High Court held that there was no error

committed by the CESTAT in declining to entertain the

application of the appellant for rectification. Holding that 9 the appeal did not disclose any substantial question of law,

the High Court dismissed the said appeal.

1. Aggrieved by the final order of the High Court

dated 21.02.2013, appellant preferred Special Leave Petition

(Civil) No. 21441 of 2013. This Court vide the order dated

22.07.2013 had issued notice while staying operation of the

impugned order dated 21.02.2013. It was further directed

that Special Leave Petition (Civil) No. 21441 of 2013 be tagged

alongwith Civil Appeal Nos. 2219-20 of 2013.

Submissions

1. Mr. Balbir Singh, learned senior counsel for the

appellant submits that the core controversy in these batch of

appeals is the eligibility of the appellant for grant of exemption

from payment of central excise duty on Naphtha, intended for

use in the manufacture of fertiliser and ammonia. The

ancillary question which arises for consideration is whether,

in a case of this nature, the extended period of limitation was

available to the revenue?

27.1. Learned senior counsel submits that for a

proper appreciation of the aforesaid two issues, it would be 10 most appropriate if he could place the facts in proper

perspective.

27.2. Appellant is a public sector undertaking operating

a fertilizer manufacturing factory at Thal, Alibaug in the State

of Maharashtra. In the said factory, it manufactures urea and

ammonia. It is stated that appellant is a registered fertilizer

manufacturer as per the Fertilizer (Control) Order, 1985.

27.3. The Fertilizer (Control) Order imposes a restriction

on the appellant from selling the manufactured fertilizer at the

market price. It mandates that the fertilizer should be sold at

the maximum retail price determined by the Central

Government. As a consequence, appellant is required to sell the

manufactured fertilizer at a price much below the cost incurred

in producing the same. The difference in the cost and the

maximum retail price is compensated to the appellant by way

of subsidies granted by the Central Government.

27.4. That apart, the raw material i.e. the inputs used

in the manufacture of fertilizer and ammonia are also

exempted from paying excise duty with a view to reduce the

cost of inputs used in the manufacture of fertilizer. Naphtha

is one such product which is exempted from excise duty 11 when intended for use in the manufacture of fertilizer or

ammonia.

27.5. During the relevant period, appellant procured

Naphtha from HPCL without payment of excise duty by

availing the benefit of exemption under notification No.

4/1997-CE dated 01.03.1997, as amended from time to

time. It is stated that Naphtha is used along with natural

gas as fuel to generate steam which in turn is used in the

manufacture of ammonia and fertilizer.

27.6. Stating that the primary activity carried out at the

appellant’s plant is the manufacture of ammonia and fertilizer,

Mr. Balbir Singh submits that the plant also has turbo

generators which generate power for captive consumption of

the plant itself. Further, the plant has a heavy water plant

which supplies heavy water to the Department of Atomic

Energy. Additionally, manufacture of certain chemicals like Di

Methyl Formamide with Di Methyl Acetamide are also carried

out at the plant of the appellant.

27.7. During the relevant period, Naphtha was used

in the appellant’s plant as fuel along with natural gas to

generate steam in the steam generating unit which had a 12 common boiler wherein both Naphtha and natural gas were

fed as inputs (fuel) in order to generate steam. The steam

so generated was sent to the ammonia plant, urea plant,

turbo generators, chemical plant and heavy water plant.

Due to the simultaneous use of Naphtha and natural gas

as fuel in the common boiler, it was not possible to

ascertain what was the quantity of Naphtha or natural gas

used or going to each respective unit as steam.

27.8. Learned senior counsel submits that during the

relevant period, around 20-25% of the total steam generated

in the steam generation plant was sent to the turbo

generators which generated and supplied power to the entire

plant. He submits that out of such power generated, a

negligible portion was used in the chemical plant.

27.9. He also clarified that the steam generated from

Naphtha and natural gas was primarily used for manufacture

of fertilizer and for production of electricity which, in turn,

was used in the fertilizer plant.

27.10. Adverting to the first show-cause notice dated

29.08.2001, learned senior counsel submits that revenue

initially demanded duty on the entire amount of steam 13 consumed in the turbo generators amounting to Rs.

25,55,40,133.00 which was subsequently reduced to Rs.

1,66,46,517.00. He submits that as per revenue’s own

assessment, only 6.5% of the electricity generated by the

turbo generators was used for non-fertilizer purposes.

Clarifying further, learned senior counsel submits that for

the period from 1996 to 2001 covered by the first show

cause notice dated 29.08.2001, the total Naphtha procured

was 7,30,721.88 metric tons which could have produced

89,52,671 units of steam. The total quantity of steam

required for the fertilizer plant during that period was

1,48,64,232. Thus, the Naphtha procured was insufficient

to produce enough steam to be consumed in fertilizer alone.

Therefore, there was no question of it being used elsewhere.

27.11. Learned senior counsel thereafter referred to the

scheme of the exemption notifications bearing No. 75/1984-

CE and No. 04/1997-CE, as amended from time to time. By

the aforesaid notifications issued under Section 5A(1) of the

Central Excise Act, 1944, the Central Government has

exempted the excisable goods specified in column (3) of the

table appended thereto from so much of the duty of excise 14 leviable thereon subject to the conditions specified therein.

He submits that Naphtha and natural gasoline liquid for use

in the manufacture of fertilizer or ammonia are mentioned

at serial No. 8 with the rate of duty mentioned as nil.

Adverting to the conditions of exemption, learned senior

counsel submits that the exemption was subject to proving

to the satisfaction of an officer not below the rank of

Assistant Commissioner of Central Excise that such goods

were cleared for the intended use specified in column (3) of

the table (in this case, for the manufacture of fertilizer or

ammonia). As per the second condition, where such use is

elsewhere than in the factory of production, the procedure

set out in Chapter X of the Central Excise Rules, 1944 would

have to be followed. As per Chapter X, the procurer has to

make an application to the Commissioner declaring that the

goods are required for the ‘intended use’ as per the

exemption notification. The Commissioner upon being

satisfied that the goods are ‘intended to be used’ for the

purpose set out in the exemption notification, issues a CT-2

certificate, authorizing the procurer to remove the goods

from the factory of production without payment of excise 15 duty. Mr. Singh submits that appellant has all along been

     issued such CT-2 certificates by the Commissioner upon

     furnishing the requisite details and execution of bond.

     27.12.      Learned senior counsel submits that there is no

     dispute to the proposition that appellant was entitled to the

     exemption under the notifications. Referring to the decision

     of this Court in Commissioner of Customs (Import), Mumbai

     Vs. M/s Dilip Kumar and Company1, he submits that once

     an assessee is held to be eligible for exemption under a

     notification, a liberal construction has to be given to such

     notification. When once the ambiguity or doubt is resolved

     by interpreting the applicability of the exemption clause

     strictly, the court may construe the notification by giving full

     play bestowing wider and liberal construction. In other

     words, the legal principle is: do not extend or widen the

     ambit at the stage of applicability. But once that hurdle is

     crossed, construe it liberally.

27.13. It is also submitted that it is not the case of the

     respondent that appellant is not eligible to avail the

     exemption at all. Case of the respondent is that Naphtha was 1 (2018) 9 SCC 1 16 not being exclusively used for the purpose for which it was

procured. He submits that once eligibility is not disputed,

the exemption notification has to be liberally construed with

regard to the scope of ‘intended use’. It is the case of the

appellant that Naphtha was procured from HPCL with the

intention to be used as a fuel for the production of ammonia

and fertilizer. However, the quantity of Naphtha procured by

the appellant during the relevant period was not even

sufficient to generate enough steam for the manufacture of

ammonia and fertilizer. Therefore, it cannot be said that

Naphtha was diverted to be used for non-fertilizer products.

27.14. It is also the admitted position that the

proportion of Naphtha or natural gas which went on to

produce steam for the fertilizer or non-fertilizer plants could

not be ascertained. Therefore, any calculation of demand on

the premise that Naphtha was being diverted for non-

fertilizer products is based on mere speculation.

27.15. It is also the contention of Mr. Balbir Singh,

learned senior counsel that the claim for exemption as per

the exemption notifications hinges on the interpretation of

the expression ‘intended use’ of the exigible good(s) in the 17 manufacture of fertilizer. He submits that when an

    exemption is conditioned on intended use, the benefit

    should be granted if the declared intended use is fulfilled.

    Explaining the principle, he submits that exemptions are

    granted to encourage or facilitate certain end uses and if an

    assessee uses the goods for that intended purpose,

    exemption’s purpose is satisfied. In this connection, he has

    placed reliance on a decision of this Court in [Steel Authority

    of India Vs. Collector of Central Excise2](https://indiankanoon.org/doc/771525/) which has held that

    requirement of the exemption notification is the proof that

    raw Naphtha was intended for use in the manufacture of

    fertilizer and not that the raw Naphtha was used in the

    manufacture of fertilizer. In this regard, he has also referred

    to another decision of this Court in the case of [State of

    Haryana Vs. Dalmia Dadri Cement Limited3](https://indiankanoon.org/doc/1041362/), where this Court

    has held that from a plain reading of the relevant clause, it

    is clear that the expression ‘for use’ must mean intended for

    use. In the present case, merely because Naphtha and

    natural gas were put into a common steam generation plant

    for the generation of steam making it impossible to ascertain 2 (1996) 5 SCC 484 3 1987 Supp SCC 679 18 which fuel ultimately ends up in which part of the factory, it

cannot be said that Naphtha was not procured with the

intention for use in the manufacture of fertilizer and

ammonia. Merely because the final destination of Naphtha

could not be conclusively determined, the benefit of

exemption cannot be denied, more so when the appellant

has continuously complied with the procedure prescribed

under Chapter X of the Central Excise Rules, 1944. Further,

despite issuance of multiple show cause notices, the

department continued to show CT-2 certificates to the

appellant on satisfaction that the intended use of the

Naphtha procured was for manufacture of fertilizer and

ammonia. That apart, appellant being a public sector

undertaking cannot be attributed with an intention to evade

duty which in any case would not arise in as much as there

would be no gain to the appellant by evading payment of

duty. Any duty paid by the appellant would be receivable by

way of Central VAT credit as the chemicals manufactured

are liable to central excise duty.

27.16. Learned senior counsel also submits that there

was no case for invocation of the extended period of 19 limitation by the respondent under the proviso to [Section

    11A(1)](https://indiankanoon.org/doc/110162683/) of the Central Excise Act, 1944 and to impose a

    penalty under Section 11AC by alleging that appellant had

    suppressed and withheld information in his applications for

    CT-2 certificates. There was no material to support such an

    allegation. Placing reliance on a decision of this Court in [Pushpam Pharmaceuticals Company Vs. Collector of Central

    Excise, Bombay4](https://indiankanoon.org/doc/1073828/), he submits that this Court has held that

    in order to invoke the extended period of limitation, the act

    of suppression must be deliberate. Respondent has failed to

    make out any case for positive effect of suppression; neither

    could it attribute any such intention to the appellant.

    27.17.              He further submits that even if it is accepted for

    the sake of argument that some portion of Naphtha was not

    eligible for the fertilizer exemption, the duty impact is

    revenue neutral. Any excise duty payable on Naphtha would

    have been available to the appellant as Central VAT credit

    for payment of excise duty on its other products. Therefore,

    no mala fide intent could be attributed to the appellant for

    the alleged evasion of payment of duty to justify invocation 4 (1995) Supp 3 SCC 462 20 of the extended period of limitation. This Court in [Nirlon

    Limited Vs. Chief Commissioner of Excise5](https://indiankanoon.org/doc/101692333/) has held that

    where the exercise would result in revenue neutrality and

    the appellant could not derive any benefit from it, it was not

    permissible for the revenue to invoke the extended period of

    limitation under the proviso to Section 11A(1). In any case,

    appellant being a public sector undertaking receiving

    subsidy from the Central Government for manufacture of

    fertilizer and ammonia, there ought not to be any

    apprehension on the part of the respondent about intention

    of the appellant to evade payment of excise duty as any

    excise duty paid by the appellant would ultimately be

    reimbursed by the Central Government by way of subsidies.

    Therefore, invocation of the extended period of limitation and

    imposition of penalty under [Section 11AC](https://indiankanoon.org/doc/110162683/) of the Central

    Excise Act, 1944 is totally unwarranted.

27.18. Concluding his submissions, learned senior

    counsel asserts that there is no substance in the contention

    of the respondent that the requirements [laid down in](https://indiankanoon.org/doc/101692333/) the

    exemption notifications have not been fulfilled. Appellant 5 (2015) 14 SCC 798 21 has complied with the requirements and is therefore entitled

to the exemption of the duty on the Naphtha procured. This

being the position, the impugned order dated 27.03.2012

passed by the CESTAT as well as the orders-in-original dated

27.01.2010 and 04.02.2010 are liable to be set aside and

quashed.

27.19. In view of the above, Mr. Singh submits that it

becomes wholly academic in so far the issue in Civil Appeal

No. _____ of 2026 (arising out of Special Leave Petition (Civil)

No. 21441 of 2013) is concerned. Consequently and in the

light of the above, Civil Appeal Nos. 2219-2220 of 2013

should be allowed and Civil Appeal No. _____ of 2026 (arising

out of Special Leave Petition (Civil) No. 21441 of 2013) may

be disposed of as having been rendered infructuous.

1. Per contra, Mr. Vikramjit Banerjee, learned

Additional Solicitor General of India appearing for the

respondent strongly supports the impugned order passed by

the CESTAT as well as the order passed by the High Court.

According to him, the issue involved in the present case is

as to whether or not Naphtha procured by the appellant from

HPCL would be eligible for the benefit of exemption under 22 notification No. 4/97 dated 01.03.1997, as amended from

time to time, in the given circumstances of the case.

28.1. In this connection, Mr. Banerjee has drawn the

attention of the Court to the relevant facts. He submits that

appellant is engaged in the manufacture of fertilizer (urea),

ammonia, organic chemicals etc. falling under Chapters 31,

28 and 29 respectively of the [First Schedule to the Central

Excise Tariff Act, 1985](https://indiankanoon.org/doc/1469183/) and is registered with the central

excise authorities. Pursuant to intelligence received, officers

of the Central Excise Department visited the premises of the

appellant on 13.02.2001 during which records were

scrutinized. Such scrutiny revealed that appellant was

procuring Naphtha at nil rate of duty from HPCL claiming

benefit of exemption under the notifications No.4/97 dated

01.03.1997, No.5/98 dated 28.02.1999 and No.6/2000 dated

01.03.2000 for manufacture of fertilizer and ammonia by

following Chapter X procedure. The scrutiny also revealed

that Naphtha was burnt in the steam generation plant to

generate steam which in turn was consumed by various

plants, such as, urea plant, ammonia plant, turbo

generators, chemical group plant and heavy water plant. 23 28.2. Based on such scrutiny, it appeared to the

department that appellant had claimed exemption

incorrectly to the extent of steam generated by burning

Naphtha and consumed in turbo generators for generating

electricity consumed in the chemical group plant for

manufacturing organic chemicals and also for use in the

heavy water plant. Therefore, a view was taken that

appellant had suppressed the actual use of Naphtha,

thereby made mis-declaration while filing applications for

CT-2 certificates to the effect that Naphtha which was

procured under exemption would be used only in the

manufacture of fertilizer and ammonia. In this regard,

statements of various persons were recorded in which it was

admitted that Naphtha was used as fuel to supplement

deficiency of natural gas. Thus, a prima facie view was taken

that Naphtha procured by the appellant without payment of

excise duty under CT-2 certificates was not used exclusively

in the manufacture of ammonia or fertilizer but was also

used in the manufacture of other goods which were not

specified in the said exemption notifications. Further, it also

appeared to the respondent that part of the electricity 24 generated from the turbo generator plant was being sold by

the appellant to Maharashtra State Electricity Board.

28.3. Learned Additional Solicitor General submits

that Naphtha and natural gas were burnt simultaneously

in the steam generation plant to generate steam. Therefore,

percentage of consumption of Naphtha for generation of steam

in the plants other than fertilizer and ammonia could not be

arrived at directly. However, it was noticed that 1,77,733.64

MT of Naphtha was consumed in other plants (i.e. plants

manufacturing other than fertilizer and ammonia), valued at

Rs. 181,68,33,704.00 during the period from 27.11.1996 to

31.03.2001 on which central excise duty worked out to Rs.

28,55,95,491.00.

28.4. Accordingly, a show cause notice dated

29.08.2001 was issued to the appellant calling upon it to

show cause as to why duty of excise to the tune of Rs.

28,55,95,491.00 for the period from 27.11.1996 to

31.03.2001 should not be levied and recovered from it

under the proviso to Section 11A(1) of the Central Excise Act

alongwith interest under Section 11AB of the said Act, besides 25 proposing imposition of penalty on the appellant under

Section 11AC also of the said Act.

28.5. In its reply dated 02.11.2001 to the aforesaid

show cause notice, appellant denied the allegation brought by

the respondent against it and submitted that steam was used

in the urea and ammonia plant; besides, part of the steam was

also used in the turbo generator plant for generating

electricity. The electricity so generated was consumed mainly

in the production of urea and ammonia. However, a small

quantity of electricity was also used in the chemical plant.

While earlier only natural gas was used for generating steam,

now because of the shortage of natural gas, Naphtha was also

being used to supplement the shortage. Appellant contended

that calculation of steam generated and percentage of steam

consumed was incorrect having been calculated from the

stage of the total quantity of steam generated in the steam

generation plant. It was also contended that the expression

‘exclusively’ was not used in the exemption notification nor

was it a condition precedent for availing the benefit of

exemption as per such notification. Appellant denied that

electricity generated in the turbo generation plant was not 26 used in the manufacture of fertilizer. Appellant also denied

that it had intentionally sold electricity to the Maharashtra

State Electricity Board but the same had to be sold under

technical compulsion. Denying that Naphtha was not being

used directly in the manufacture of fertilizer, appellant

asserted that it had fulfilled the conditions of the exemption

notifications. Appellant, therefore, sought for dropping of

the show cause notice.

28.6. However, the reply of the appellant was not

accepted by the revenue resulting in the passing of the

order-in-original dated 04.02.2002.

28.7. Though the appellant had challenged the

aforesaid order-in-original before the CESTAT, the same

resulted in several rounds of litigation back and forth and also

requiring the appellant to approach the High Court regarding

pre-deposit. Ultimately, the original adjudicating authority

passed two separate orders i.e. order-in-original dated

27.01.2010 in respect of the first show cause notice dated

29.08.2001 and secondly, order-in-original dated 04.02.2010

for the balance twenty five show cause notices. By both the 27 orders, the adjudicating authority upheld the revised demand

with interest besides confirming the penalty imposed.

28.8. Appellant challenged the two orders-in-original

before the CESTAT in two separate appeals, both of which

were disposed of vide the common order dated 27.03.2012

confirming the duty demanded alongwith interest and

upholding the penalty imposed under Section 11AC of the

Central Excise Act, 1944 but setting aside the penalties

imposed under Rule 173Q of the Central Excise Rules, 1944

and under Rule 25 of the Central Excise Rules, 2002.

28.9. Mr. Banerjee submits that the impugned order is

fully justified; it is legal and valid and no case has been made

out for interference, either on facts or on law.

28.10. In so far the appeal arising out of the order of the

High Court is concerned, learned Additional Solicitor General

submits that the application seeking rectification was rightly

rejected by the CESTAT. It is one thing to plead grounds of

challenge in the memo of appeal but altogether another thing

to argue those grounds during the hearing. If the grounds are

not argued, it is not incumbent upon the CESTAT to return 28 findings on such grounds. Therefore, High Court rightly

rejected the appeal and upheld the order of the CESTAT.

Analysis

28.11. Learned Additional Solicitor General submits that

no case has been made out for interference by the appellant.

Therefore, all the appeals should be dismissed.

1. Submissions made by learned counsel for the

parties have received the due consideration of the Court.

1. Let us first deal with the show cause notices.

For the sake of convenience, the first show cause notice

issued by the Director General of Central Excise Intelligence

to the appellant dated 29.08.2001 may be adverted to. After

referring to the manufacturing activities of the appellant and

the availing of central excise duty on obtaining of CT-2

certificates and after examining the statements of officials of

the appellant, it was mentioned that from a scrutiny of the

record and the statements of the officials recorded, it had come

to light that Naphtha procured by the appellant without

payment of duty under CT-2 certificates was not used

exclusively for the manufacture of fertilizer or ammonia but 29 was also being used in the manufacture of other goods which

were not specified in the exemption notifications. Exemption

granted for Naphtha to be used in the manufacture of fertilizer

or ammonia could not be extended to goods other than

fertilizer or ammonia.

30.1. Further observation was made that part of the

electricity generated from the turbo generator plant was being

sold by the appellant to Maharashtra State Electricity Board.

The show cause notice noted that there was a digital

control system in the steam generation plant which could

measure the flow of steam. It was also observed that

Naphtha and natural gas were burnt simultaneously in

the steam generation plant to generate steam. Therefore,

the percentage of consumption of Naphtha in the generation

of steam used in the plants other than fertilizer and ammonia

could not be arrived at directly. However, on the basis of the

statements of the officials, percentage of steam consumed in

plants other than fertilizer and ammonia was worked out and

thereby the quantum of Naphtha consumed to generate this

steam was arrived at. Applying the above methodology, the

total Naphtha consumed in the plants other than fertilizer and 30 ammonia was determined at 1,77,733.64 MT valued at Rs.

181,68,33,704.0 on which the central excise duty which was

payable during the period from 27.11.1996 to 31.03.2001

worked out to Rs. 28,55,95,491.00 which was liable to be paid

by the appellant.

30.2. A view was taken by the revenue that appellant

had contravened the provisions of Rule 192 of the Central

Excise Rules, 1944 in as much as it had suppressed actual

use of Naphtha by mis-declaring in its applications for CT-2

certificates that the Naphtha procured without payment of

excise duty would be used for fertilizer and ammonia. Because

of such suppression, appellant was liable for penalty under

Rule 173Q of the Central Excise Rules, 1944 read with [Section

11AC](https://indiankanoon.org/doc/110162683/) of the Central Excise Act, 1944. Appellant was also liable

to pay interest on the amount adjudged to be payable by

it in terms of Section 11AB of the Central Excise Act, 1944.

Thus, the proviso to Section 11A(1) of the Central Excise Act,

1944 would be attracted. Therefore, appellant was called upon

to show cause to the Commissioner, Central Excise, Mumbai-

VII as to why:

31

i. central excise duty amounting to Rs. 28,55,95,491.00

(Rs. Twenty Eight Crore Fifty Five Lakhs Ninety Five

Thousand Four Hundred Ninety One Only) as detailed

in Annexures-A, B, C and D to the notice, should not

be demanded and recovered from the appellant under

Rule 196 of the Central Excise Rules, 1944 read with

the proviso to Section 11A(1) of the Central Excise Act,

1944 by invoking the extended period of limitation of

five years;

ii. penalty should not be imposed upon the appellant

under Rule 173Q of the Central Excise Rules, 1944

and Section 11AC of Central Excise Act, 1944;

iii. interest on the amount adjudged to be payable by the

appellant should not be charged and recovered from

it under Section 11AB of the Central Excise Act, 1944.
31. In its reply dated 02.11.2001, appellant denied

the allegations made by the respondent in the show cause

notice dated 29.08.2001. Thereafter, appellant stated that it

is a public sector undertaking under the Ministry of

Fertilizers and Chemicals, Government of India. It is

engaged inter alia in the manufacture of fertilizer falling

under Chapter 31 of the Central Excise Tariff Act, 1985 32 having its factory at Thal, Alibaug in the State of

Maharashtra. Appellant stated that it scrupulously follows

and observes all the formalities and procedures in the

manufacture and clearance of the excisable goods.

31.1. Explaining the process of manufacture, appellant

stated that it had an annual installed capacity for

manufacture of 14.85 lakh MT of the fertilizer urea at its

factory. In the manufacturing process, steam is used in the

urea and ammonia plant. The steam is generated in the

steam generation plant. A part of the steam so generated is

also used in the turbo generation plant for generation of

electricity mostly for in-house consumption.

31.2. The steam is produced in the steam generation

plant by using both natural gas and Naphtha simultaneously

as the appellant is equipped with a dual fuel firing system for

which it is also maintaining the data of natural gas and

Naphtha used. Thereafter, appellant explained the procedure

which is followed in the steam generation plant. However,

steam is not only generated in the steam generation plant

by using Naphtha and natural gas but it is also generated in

the ammonia plant.

33 31.3. Appellant explained that the steam generation

plant was totally a utility plant providing steam and power to

the factory as a whole. It was essential because without a

reliable and efficient supply system of steam, a modern

fertilizer plant cannot operate on a sustained and competitive

basis. To ensure the smooth and continuous running of the

boilers, those were always kept on dual firing mode.

31.4. Appellant pointed out that the principal allegation

in the show cause notice was that appellant had procured

Naphtha without payment of central excise duty against

CT-2 certificates by availing exemption under the relevant

exemption notifications; however, the same was not exclusively

used in the manufacture of fertilizer or ammonia but was

also used in the manufacture of other goods which were not

specified in the exemption notifications. Referring to the

exemption notifications, appellant pointed out that nowhere

in the said notifications was the word ‘exclusively’ used;

neither has it been a condition for extending the benefit of

exemption. Revenue had erroneously read into the exemption

notifications the word ‘exclusively’.

34 31.5. Appellant stated that it appeared that the revenue

sought to recover the duty on the quantity of Naphtha

procured on the ground that the electricity generated by using

steam in the turbo generation plant was not used in the

manufacture of fertilizers but used elsewhere and that the

steam generated from Naphtha was not directly used in the

manufacture of fertilizer but used in the turbo generation

plant for generating electricity which in turn was used in the

plant manufacturing fertilizer. In other words, appellant

pointed out that what the revenue was articulating was that

the benefit of the exemption notifications would be available

only if the Naphtha was directly used in the manufacture of

fertilizer.

31.6. Denying and contesting the same, appellant stated

that it would be wrong to assume that the electricity generated

in the turbo generation plant was not used in the manufacture

of fertilizer. Insofar the allegation qua selling of electricity to

Maharashtra State Electricity Board was concerned, it was

pointed out that appellant did not generate electricity for the

purpose of selling it to the Maharashtra State Electricity Board

but it was a technical compulsion under which appellant had 35 to import and export electricity from Maharashtra State

Electricity Board, the methodology of which was explained in

the reply.

31.7. Appellant pointed out from the exemption

notifications that exemption is allowed if the goods are

cleared for the ‘intended use’ as specified in column (3) of

the table to the notifications. It would be an incorrect

interpretation to say that if Naphtha was not used directly

in the manufacture of fertilizer then the benefit of exemption

would not be available to the Naphtha consumed in the

manufacture of fertilizer. Naphtha was procured from HPCL

after submitting necessary CT-2 certificates categorically

stating that Naphtha would be used in the manufacture of

fertilizer. The use of Naphtha could be both direct and

indirect. In so far appellant is concerned, Naphtha was used

as a supplementary fuel for generation of steam at the steam

generation plant. Out of the total quantity of steam so

generated, around 75% was used directly in the fertilizer

plant and balance 25% was used in the production of

electricity in the turbo generation plant. However, the 36 generated electricity was not used elsewhere but used in the

fertilizer plant only.

31.8. Asserting that appellant had used the Naphtha

so procured in the generation of steam which in turn was

used in the manufacture of fertilizer directly and also

through generation of electricity in the turbo generation

plant, it was contended that the appellant had fulfilled the

conditions of the exemption notifications issued for Naphtha.

31.9. In the circumstances, appellant requested the

respondent to drop the show cause notice.

1. As already noticed above, adjudication of the

show cause notices passed through several rounds of

litigation. Ultimately, the adjudicating authority passed two

orders-in-original, one dated 27.01.2010 pertaining to the

show cause notice dated 29.08.2001 and the other dated

04.02.2010 in respect of the subsequent twenty-five show

cause notices, though all the show cause notices were on

the same issue. The reasonings being the same, we may

advert to the order-in-original dated 27.01.2010.

32.1. After noticing the reply of the appellant that

there was shortfall of Naphtha to manufacture the steam for 37 production of fertilizer which was met by using natural gas

so as to bridge the gap and, therefore, there was no question

of diversion of Naphtha for manufacture of other goods, the

adjudicating authority did not accept the same. Referring to

the statements of the officials, the adjudicating authority

came to the conclusion that Naphtha was not in short

supply; rather it was natural gas which was in short supply.

The steam generated out of natural gas and Naphtha, apart

from being used for the specified purpose i.e. in the

manufacture of fertilizer and ammonia, was also used for

certain non-specified purposes i.e. in the manufacture of

organic chemicals, heavy water plant as well as for

generation of electricity. Further, part of the electricity

generated was sold to Maharashtra State Electricity Board.

32.2. The adjudicating authority also held that both

Naphtha and natural gas were burnt simultaneously in the

steam generation plant to generate steam. However, the

percentage of consumption of Naphtha in the generation of

steam used in the plants other than fertilizer and ammonia

could not be arrived at directly but revenue has worked

out a mechanism to determine the demand. Therefore, the 38 adjudicating authority rejected the explanation of the assessee

saying that it was not possible to quantify the natural gas and

Naphtha used qua the specified quantities of the final product

manufactured.

32.3. In so far the contention of the assessee that in

order to be eligible for the benefit of exemption what was

required to be established was only the ‘intended use’, the

adjudicating authority held that in addition to being used

for the manufacture of fertilizer and ammonia, the procured

Naphtha was certainly used for other purposes which

disentitled the appellant from availing the benefit of the

exemption notifications.

32.4. As regards the extended period of limitation is

concerned, the adjudicating authority held as under:

1. In the present case, the assessee very well knew that the percentage of consumption of naphtha in generation of steam used in plants, other than fertilizer and ammonia cannot be arrived at directly. Despite this fact, they chose to avail the exemption (which was available only when the basic feed is used in the manufacture of fertilizer) and continue to justify it by arithmetical calculations. There should have at least been a proportionate payment (to the extent of naphtha not used in the manufacture of fertilizer, using the very 39 same arithmetical calculations). This was not the case, even at the adjudication stage, they continued to maintain the same stand. As such the allegations in the notice to this extent are correct.

32.5. Therefore, the adjudicating authority confirmed

the central excise duty besides the penalty imposed under

Rule 173Q of the Central Excise Rules, 1944 read with Section 11AC of the Central Excise Act, 1944 and Rule 25 of

the Central Excise Rules, 2002. That apart, the adjudicating

authority ordered that interest under Section 11AB of the

Central Excise Act, 1944 was also required to be paid by the

appellant.

1. We may now turn to the impugned order dated

27.03.2012 passed by the CESTAT. It has been noted that

appellant had received Naphtha under Chapter X procedure

and under Rule 6 of the Central Excise (Removal of Goods at

Concessional Rate of Duty for Manufacture of Excisable

Goods) Rules, 2001 from HPCL under Notification Nos. 4/97,

5/98, 5/99, 6/2000 and 6/2002 which were prevalent during

the relevant time. Adverting to the said notifications, it was

pointed out that exemption of excise duty was granted to

Naphtha and natural gasoline liquid for use in the 40 manufacture of fertilizer or ammonia subject to the conditions

that it should be proved to the satisfaction of an officer not

below the rank of Assistant Commissioner of Central

Excise/ Deputy Commissioner of Central Excise that such

goods were cleared for the intended use as specified (in this

case, for use in the manufacture of fertilizer or ammonia);
and where such use was elsewhere than in the factory of

production, the procedure set out in Chapter X of the

Central Excise Rules, 1944 was followed.

33.1. CESTAT noted that both Naphtha and natural

gas were used together to produce steam in the steam

generation plant. CESTAT also noted that as the steam

produced out of Naphtha and natural gas was not separately

stored, it was difficult to say steam produced out of which

fuel was going to the manufacture of fertilizer and non-

fertilizer products. It was observed that as both the fuels

were used together, it was not possible to extricate the

quantities of the steam produced out of Naphtha and

natural gas as shown in the chart submitted by the

appellant. Therefore, CESTAT was of the view that the ratio

of the total steam used for non-fertilizer use and the total 41 steam generated out of both fuels should be taken for

ascertaining the quantity of Naphtha or natural gas

consumed for non-fertilizer purposes. Since revenue relied

upon the statement of one Shri V.G. Londhe, Finance

Manager of the appellant wherein he stated that natural gas

was the main fuel and Naphtha was used as a supplement

and held that from such statement, the percentage of steam

consumed for non-fertilizer purposes could be ascertained

which in fact was relied upon by the revenue in the show

cause notice. Therefore, CESTAT concluded that demanding

duty on the basis of proportionate use for non-fertilizer

purposes was a reasonable method for determining and

demanding duty.

33.2. CESTAT also rejected the contention of the

appellant that Naphtha was in short supply which was

admitted by the department and that when something was

in short supply, allegation of diversion of the same cannot

survive.

33.3. As regards the exemption notifications,

CESTAT was of the view that in so far the description of

goods for exemption was concerned, the expression used 42 was Naphtha and natural gasoline liquid ‘for use’ in the

manufacture of fertilizer or ammonia whereas in the first

condition, the expression used was that the exemption

would be allowed if it was proved to the satisfaction of the

Assistant Commissioner of Central Excise or Deputy

Commissioner of Central Excise that such goods were

cleared for the ‘intended use’. According to CESTAT, in the

present case, Naphtha was manufactured by HPCL and when

the goods (Naphtha) was cleared from HPCL, the first

condition would be satisfied if the Assistant Commissioner or

Deputy Commissioner was satisfied about such ‘intended use’

but the appellant was the recipient of Naphtha under Chapter

X procedure or under the Central Excise (Removal of Goods at

Concessional Rate of Duty for Manufacture of Excisable

Goods) Rules, 2001. Thus, it was for the appellant to satisfy,

if it wanted to avail the exemption, that the goods were ‘for

use’ in the manufacture of fertilizer and ammonia which it

failed to do. Therefore, appellant cannot avail any benefit out

of the expression ‘intended use’.

33.4. After differentiating the various citations relied

upon by the appellant, CESTAT held that in the present case, 43 it was not the supplier of Naphtha who was proposed to be

denied the benefit of exemption. Demand of duty was against

the user of the good and the question is whether the user was

eligible for exemption or not. Adverting to the relevant

provisions of Chapter X and the Central Excise (Removal of

Goods at Concessional Rate of Duty for Manufacture of

Excisable Goods) Rules, 2001, CESTAT held that the

recipient was required to pay the duty on the goods (Naphtha)

procured if the goods were not used in the manufacture of

fertilizer. Therefore, CESTAT concluded that duty was rightly

demanded on the quantity of Naphtha not used in the

manufacture of fertilizer or ammonia and accordingly upheld

the finding of the adjudicating authority in this regard.

33.5. After adverting to Rule 173Q of the Central

Excise Rules, 1944 and Rule 25 of the Central Excise Rules,

2002 as well as Section 11AC of the Central Excise Act,

1944, CESTAT held as under:

1. We find that the appellants in this case are not manufacturer of raw naphtha which was received by them under Chapter X procedure and under Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001. Therefore, we are of the view that they will not be covered 44 under the definition of manufacturer, producer, registered person of a warehouse or a registered dealer as mentioned in Rule 173Q or Rule 25 of the Central Excise Rules. Therefore, they are not liable to penalty under the provisions of these Rules. However, we find that on going through Section 11AC, the person who is liable to pay duty as determined under sub-section (2) of Section 11A shall be liable to pay a penalty equal to the duty so determined. We also find that Section 11A has been made applicable to the recipient of the goods under Chapter X procedure and under Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 as Section 11A is separately mentioned in Rule 196 of the Central Excise Rules and in Rule 6 of Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001. We, therefore, uphold the penalty imposed by the adjudicating authority in Order No. 31/2009 dated 27.01.2010 under Section 11AC of the Act on the appellant. However, penalty imposed under Rule 173Q and Rule 25 of the Central Excise Rules in Order No. 32-56/2009 dated 05.02.2010 is set aside.

1. Let us now have a broad overview of the relevant

statutory framework.

1. Section 5A of the Central Excise Act deals with

the power to grant exemption from duty of excise. As per

sub-section (1), if the Central Government is satisfied that it 45 is necessary in the public interest so to do, it may, by

notification in the official gazette, exempt generally either

absolutely or subject to such conditions (to be fulfilled before

or after removal) as may be specified in the notification,

excisable goods of any specified description from the whole

or any part of the duty of excise leviable thereon.

1. Heading of Section 11 is recovery of sums due to

Government. In this case, we are concerned with sub-section

(1). It says that in respect of duty and any other sums of any

kind payable to the Central Government under any of the

provisions of the Central Excise Act or of the rules made

thereunder, the officer empowered by the Central Board of

Excise and Customs to levy such duty or require the

payment of such sums may deduct or require any other

Central Excise Officer or a proper officer referred to in Section 142 of the Customs Act, 1962 to deduct the amount

so payable from any money owing to the person from whom

such sums may be recoverable or due which may be in his

hands or under his disposal or control or may be in the

hands or under disposal or control of such other officer or

may recover the amount by attachment and sale of excisable 46 goods belonging to such person. Prior to 10.05.2013, this

provision provided for deducting the amount so payable

from any money owing to the person from whom such sums

may be recoverable or due which may be in his hands or

under his disposal or control or may recover the amount.

1. We may mention that we are dealing with the

demand of the revenue for the period from November, 1996 to

February, 2005. Therefore, the law which prevailed during

that point of time would be relevant. As noticed in the previous

paragraph, Section 11 as it stood prior to 10.05.2013 would

be applicable. In so far Section 11A is concerned, the provision

which stood in the statute book prior to its amendment with

effect from 08.04.2011 would be applicable. Section 11A as it

stood prior to 08.04.2011 deals with recovery of duties not

levied or not paid or short-levied or short-paid or erroneously

refunded. Sub-section (1) says that when any duty of excise

has not been levied or paid or has been short-levied or short-

paid or erroneously refunded, whether or not such non-levy

or non-payment, short-levy or short payment or erroneous

refund, as the case may be, was on the basis of any approval,

acceptance or assessment relating to the rate of duty on or 47 valuation of excisable goods under any other provisions of

the Central Excise Act or the rules made thereunder, a

Central Excise Officer may, within one year from the relevant

date, serve notice on the person chargeable with the duty

which has not been levied or paid or which has been short

levied or short paid or to whom the refund has erroneously

been made, requiring him to show cause as to why he should

not pay the amount specified in the notice.

37.1. Thus, as would be evident from the above, the

normal limitation period for issuance of show cause notice

in case of duty not levied or not paid or short-levied or short

paid or erroneously refunded in terms of Section 11A was

one year from the relevant date prior to 08.04.2011.

1. This brings us to the proviso to sub-section (1)

of Section 11A, as it stood at the relevant point of time,

which is relevant and is therefore extracted hereunder:

Provided that where any duty of excise has not been
levied or paid or has been short-levied or short-paid or
erroneously refunded by reason of fraud, collusion or
any wilful mis-statement or suppression of facts, or
contravention of any of the provisions of this Act or of
the rules made thereunder with intent to evade payment
of duty, by such person or his agent, the provisions of 48 this sub-section shall have effect, as if for the words one
years, the words “five years” were substituted.

38.1. Thus, the proviso to sub-section (1) of Section 11A

provides that where any duty of excise has not been levied or

paid or has been short-levied or short paid or erroneously

refunded by reason of fraud, collusion or any willful mis-
statement or suppression of facts or contravention of any of

the provisions of the Central Excise Act or of the rules made

thereunder with the intent to evade payment of duty, by

such person or his agent, the limitation period of one year

would stand extended to 5 years. In the aforesaid

circumstances as enumerated hereinabove, the normal

period of limitation of one year would stand extended to

five years. However, the non-levy or non-payment or short

levy etc., in which event, the limitation period of issuing

show cause notice would stand extended to five years, is

dependent upon fulfilment of two conditions. The first

condition is that it should be by reason of fraud, collusion

or any willful mis-statement or suppression of facts;

secondly, it can also be for contravention of any of the

provisions of the Central Excise Act and the Central Excise 49 Rules but with the intention to evade payment of duty. In

the second case, the intention to evade payment of duty is

crucial and, therefore, must be discernible.

1. Section 11AA provides for interest on delayed

payment of duty. Prior to 08.04.2011, Section 11AA and Section 11AB of the Central Excise Act provided for interest on

delayed payment of duty under different situations. However,

with effect from 08.04.2011, the two provisions have been

merged and have now become Section 11AA.

1. On the other hand, Section 11AC of the Central

Excise Act says that there shall be imposition of penalty for

short-levy or non-levy of duty in certain cases.

1. We may now turn to the Central Excise Rules,

1944 which has since been replaced by the Central Excise

Rules, 2002.

1. Rule 173Q of the Central Excise Rules, 1944

deals with confiscation and penalty. Sub-rule (1) says that

subject to the provisions contained in Section 11AC of the

Central Excise Act and Rule 57AH, if any manufacturer,

producer, registered person of a warehouse or a registered

dealer:

50

a) removes any excisable goods in contravention of any

of the provisions of the Central Excise Rules, 1944; or

b) does not account for any excisable goods manufactured,

produced or stored by him; or

bb) takes credit of duty in respect of inputs or capital

goods for being used in the manufacture of final product

or capital goods for use in the factory of manufacturer

of final product, as the case may be, wrongly or without

taking reasonable steps to ensure that appropriate duty

on the said inputs or capital goods has been paid etc. or

takes credit of duty which he knows or which he has

reason to believe, is not permissible under the Central

Excise Rules do not utilises the inputs or capital goods

in the manner provided for in the rules or utilizes credit of

duty in respect of inputs or capital goods in contravention

of any of the provisions of the Central Excise Rules etc.; or

bbb) enters wilfully or incorrect particulars in the

invoice issued for the excisable goods dealt by him with

intent to facilitate the buyer to avail of credit of the duty

of excise or the additional duty under Section 3 of the 51 Customs Tarriff Act, 1975 in respect of such goods

which are not permissible under the Rules; or

c) engages in the manufacture, production or storage of

any excisable goods without having applied for the

registration certificate; or

d) contravenes any of the provisions of the Central

Excise Rules with intent to evade payment of duty,

then all such goods shall be liable to confiscation and the

manufacture, producer or registered person of a

warehouse or a registered dealer, as the case may be, shall

be liable to a penalty not exceeding the duty on the

excisable goods in respect of which any contravention of

the nature referred to above has been committed or ten

thousand rupees, whichever is greater.
43. Chapter X deals with remission of duty on goods

used for special industrial purposes. Rules 192 to 196BB

comprise Chapter X. Provisions under this chapter provide

that where the Central Government has by notification

under Rule 8 or Section 5A of the Central Excise Act, as the

case may be, sanctioned the remission of duty on excisable

goods other than salt, used in a specified industrial process, 52 any person wishing to obtain remission of duty on such

goods shall make application to the Commissioner in the

proper Form detailing the requirements including the

purpose and manner in which it is intended to use the

excisable goods and declaring that the goods will be used for

such purpose and in such manner. It provides for granting

the application subject to satisfaction of the Commissioner.

43.1. Rules 196 also provides that 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 or are not shown to the satisfaction

of the proper officer to have been lost or destroyed by natural

causes etc. the applicant shall on demand by the proper

officer, immediately pay the duty leviable on such goods. In

such an event, the concession may be withdrawn by the

Commissioner besides forfeiture of the security deposited and

confiscation of the excisable goods and all goods manufactured

from such goods, in store at the factory.

1. Rule 25 of the Central Excise Rules, 2002 deals

with confiscation and penalty. Four conditions are mentioned 53 in sub-rule (1) which may lead to confiscation of the excisable

goods besides imposition of penalty. Rule 25 read thus:

Rule 25. Confiscation and penalty. (1) Subject to the
provisions of section 11AC of the Act, if any producer,
manufacturer, registered person of a warehouse or an
importer who issues an invoice on which CENVAT credit
can be taken or a registered dealer, -

(a) removes any excisable goods in contravention of
any of the provisions of these rules or the notifications
issued under these rules; or

(b) does not account for any excisable goods produced
or manufactured or stored by him; or

(c) engages in the manufacture, production or storage
of any excisable goods without having applied for the
registration certificate required under section 6 of the
Act; or

(d) contravenes any of the provisions of these rules or
the notifications issued under these rules with intent
to evade payment of duty,

then, all such goods shall be liable to confiscation and
the producer or manufacturer or registered person of the
warehouse or an importer who issues an invoice on which
CENVAT credit can be taken or a registered dealer, as the
case may be, shall be liable to a penalty not exceeding the
duty on the excisable goods in respect of which any
contravention of the nature referred to in clause (a) or
clause (b) or clause (c) or clause (d) has been committed,
or five thousand rupees, whichever is greater.
54 An order under sub-rule (1) shall be issued by the
Central Excise Officer, following the principles of natural
justice.

1. In exercise of the powers conferred by Section 37 of the Central Excise Act, 1944, the Central Government has

made the Central Excise (Removal of Goods at Concessional

Rate of Duty for Manufacture of Excisable Goods) Rules,

1. These rules are applicable to a manufacturer who

intends to avail of the benefit of a notification issued under

sub-section (1) of Section 5A of the Central Excise Act, 1944

granting exemption of duty to excisable goods when used for

the purpose specified in that notification. The procedure for

availing of such benefit is laid down in the Rules 3 to 5.

45.1. Rule 6 of the aforesaid rules deals with recovery

of duty in certain cases. It says that where the subject goods

are not used by the manufacturer for the intended purpose,

the manufacturer shall be liable to pay the amount equal to

the difference between the duty leviable on such goods but

for the exemption and that already paid, if any, at the time

of removal from the factory of the manufacturer of the

subject goods alongwith interest and provisions of Section

11A and Section 11AB of the Central Excise Act, 1944 shall 55 apply mutatis mutandis for effecting such recovery. The

Explanation clarifies that such goods shall be deemed not

to have been used for the intended purpose even if any of the

quantity of the subject goods is lost or destroyed by natural

causes or by unavoidable accidents during transportation

from the place of procurement to the manufacturer’s premises

or during handling or storage in the manufacturer’s premises.

Rule 6 is extracted as under:

1. Recovery of duty in certain cases.- Where the subject goods are not used by the manufacturer for the intended purpose, the manufacturer shall be liable to pay the amount equal to the difference between the duty leviable on such goods but for the exemption and that already paid, if any, at the time of removal from the factory of the manufacturer of the subject goods, along with interest and the provisions of Section 11A and Section 11AB of the Central Excise Act, 1944 (1 of 1944) shall apply mutatis mutandis for effecting such recoveries. Explanation. – For the removal of doubts, it is hereby clarified that subject goods shall be deemed not to have been used for the intended purpose even if any of the quantity of the subject goods is lost or destroyed by natural causes or by unavoidable accidents during transport from the place of procurement to the manufacturer’s premises or 56 during handling or storage in the manufacturer’s premises.

1. Let us now turn our attention to the exemption

notification No. 75/1984-CE dated 01.03.1984. This

notification was issued by the Central Government in

exercise of the powers conferred by sub-rule (1) of Rule 8 of

the Central Excise Rules, 1944 exempting the goods

described in column (3) of the table appended thereto and

included in the first [Schedule to the Central Excise Act,

1944](https://indiankanoon.org/doc/110162683/) from so much of the duty of excise leviable thereon

subject to the intended use or the conditions laid down in the corresponding entry in the table appended. At serial No.

6.02 is mentioned raw Naphtha at the concessional rate of

duty as mentioned in column (4). In column (5) of the table,

it is mentioned that such concessional rate of duty would be

available if the raw Naphtha was procured for the intended

use in the manufacture of fertilizers and ammonia. As per the

proviso, where the intended use was in the manufacture of

ammonia, such ammonia was used elsewhere in the

manufacture of fertilizers and the procedure set out in

Chapter X of the Central Excise Rules, 1944 was followed.

However, the notification clarified that such exemption for the 57 intended use would be subject to the following further

conditions:

(i) It was proved to the satisfaction of an officer not

below the rank of Assistant Collector of Central

Excise that such goods were used for the intended

use specified in column (5) of the appended table;
and

(ii) Where such use was elsewhere than in the factory

        of production, the procedure set out in [Chapter X of

        the Central Excise Act, 1944](https://indiankanoon.org/doc/110162683/) was followed.

1. The next notification is notification No. 4/1997-

CE dated 01.03.1997. In exercise of the powers conferred

by sub-section (1) of Section 5A of the Central Excise Act,

1944, the Central Government being satisfied that it is

necessary in the public interest so to do, exempted the

excisable goods specified in column (3) of the appended

table and included in the [Schedule to the Central Excise

Tariff Act, 1985](https://indiankanoon.org/doc/1469183/) as specified in the corresponding entry to

column (2) of the table from so much of the duty of excise

leviable thereon as specified in the corresponding entry in

column (4), subject to any of the conditions specified in the 58 annexures to the said notification, which were mentioned

in the corresponding entry in column (5) of the appended

table. At serial No. 8 is mentioned the excisable goods

Naphtha and natural gasoline liquid for use in the

manufacture of fertilizer or ammonia. The rate of duty is nil

and it is subject to condition Nos. 3 and 4 as per the

annexure. Condition Nos. 3 and 4 are the same as the

conditions mentioned in the proviso to the notification No.

75/84-CE. Since this notification is important, relevant

portion thereof is extracted hereunder:

Notification No. 4/1997-CE Dated 01-03-1997

S. Chapter or Description of Rate Condi
No. heading No. goods -tions
or sub-
heading No.
(1) (2) (3) (4) (5)

---

1. 27 Naphtha and Natural Nil 3 and Gasoline Liquid for 4 use in the manufacture of fertiliser or ammonia * * * * * * * *

                    ANNEXURE

Condition No. Conditions

---

1.      The exemption shall be subject to proving
   

   to the satisfaction of an officer not below 59 the rank of the Assistant Commissioner of
   Central Excise, that such goods are cleared
   for the intended use specified in column (3)
   of the said Table.

2.     Where such use is elsewhere than in the
   

   factory of production, the procedure set out
   in Chapter X of the Central Excise Rules,
   1944 is followed.

---

1. Having surveyed the law and the exemption

notifications, let us now turn to the show cause notices. The

first show cause notice is dated 29.08.2001. This show cause

notice covers the period from 27.11.1996 to 31.03.2001.
Within the aforesaid period, the last period in respect of

which the aforesaid show cause notice was issued was from

16.02.2001 to 31.03.2001. The subsequent 25 show cause

notices are from dated 05.10.2004 to dated 03.08.2005. The

show cause notice dated 05.10.2004 covered the period from

September, 2003 to June, 2004. As regards the show cause

notice dated 03.08.2005 is concerned, the same covered the

period from July, 2004 to February, 2005.

1. As we have noted above, prior to 08.04.2011,

the limitation period under Section 11A of the Central

Excise Act was one year. It is thus evident that all the show

cause notices issued to the appellant pertained to periods 60 which were beyond one year. In such circumstances,

respondent invoked the extended period of limitation under

the proviso to sub-section (1) of Section 11A of the Central

Excise Act. We have also noted that the extended limitation

period of five years would be available to the respondent in

a case where any duty of excise has not been levied or not

paid or has been short levied or short paid or erroneously

refunded by reason of fraud or collusion or on account of

any willful mis-statement or suppression of facts or

contravention of any of the provisions of the [Central Excise

Act](https://indiankanoon.org/doc/110162683/) or of the Rules made thereunder with the intent to evade

payment of duty.

1. Thus, fraud, collusion, willful mis-statement or

suppression of facts stand in one category and contravention

of any of the provisions of the Central Excise Act or the rules

made thereunder is another category. In the first category,

the act is deliberate and is so egregious that such omission

or infraction would by itself be sufficient to attract the

extended period of limitation. However, in the later category,

the contravention of the statute would have to be accompanied 61 by an intent to evade payment of duty to attract the extended

period of limitation.

1. Let us now examine some of the judgments

cited at the Bar and their applicability to the facts of the

present case.

1. In Dalmia Dadri Cement Ltd., this Court was

examining applicability of an exemption granted under Section 5(2)(a) of the Punjab General Sales Tax Act, 1948 to

the assessee, who had claimed the exemption on the cement

sold by it to the Punjab State Electricity Board for use by it in

the generation or distribution of electrical energy. This Court

examined the import of the expression for use as appearing

in Section 5(2)(a)(iv) of the Punjab General Sales Tax Act,

1. After noting that the important words used in the said

provision are ‘goods for use by it in the generation or

distribution of such energy’, this Court opined that on a

plain reading of the relevant clause, it was clear that the

expression for use must mean intended for use. It was

explained that if the intention of the legislature was to limit

the exemption only to such goods sold as were actually used

by the undertaking in the generation and distribution of 62 electrical energy, the phraseology used in the exemption

clause would have been different as, for example, ‘goods

actually used’ or ‘goods used’.

52.1. Thus, this Court expressed the view that the

real question which it was called upon to determine was

whether the cement supplied was intended for use directly

in the generation or distribution of electrical energy. If it

was so intended, the exemption was attracted but not

otherwise. Certificates issued by the Punjab State

Electricity Board clearly showed that the intention of the

Board was that the cement should be used for a purpose

directly connected with the generation or distribution of

electrical energy. The mere fact that some of the cement

supplied was infact used by the Board for activities not

directly connected with the generation or distribution of

electrical energy would not make any difference regarding

the availability of the exemption.

1. This expression intended for use again came up

for consideration in the case of Steel Authority of India Ltd.

That was a case where Steel Authority of India Limited

(SAIL) procured Naphtha from the market at concessional 63 rate of duty in terms of the extant exemption notification for

use in its plant at Rourkela for manufacturing of fertilizer.

It was the case of the revenue that a substantial

quantity of raw Naphtha was not infact utilised by SAIL in

the manufacture of fertilizer. SAIL was, therefore, served

with show cause notices demanding amounts of excise duty

of raw Naphtha allegedly not utilized for the manufacture of

fertilizer. When the matter reached this Court, it was noted

that the exemption notification required proof that the raw

Naphtha was intended for use in the manufacture of

fertilizer and not that the raw Naphtha was used in the

manufacture of fertilizer. This Court did not agree with the

view taken by CESTAT that it was a requisite that it should

be proved that the raw Naphtha had been actually used in

the manufacture of fertilizer and held that what was

required to be shown was that the raw Naphtha was used

for the purpose and with the intention of manufacturing

fertilizer. In the facts of that case, this Court observed that

raw Naphtha that was fed by SAIL into its plant was for the

purpose and with the intention of manufacturing fertilizer

and that it was only because of supervening circumstances 64 i.e. the low, uncertain and fluctuating availability of power

that the reformed gas produced during the interim stage of

manufacture had to be vented out. Therefore, the benefit of

the exemption notification was available to SAIL in regard

to the raw Naphtha that it utilized in its plant for the

manufacture of fertilizer but which for reasons over which

it had no control did not, infact, result in the manufacture

of fertilizer but had, at the interim stage of reformed gas, to

be vented out. This Court held thus:

1. 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 a requisite that it should be proved that the raw naphtha 65 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.

1. 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.

2.     Applying the above to the facts of the present
   

case, it is quite evident that Naphtha which was procured

from HPCL was intended for use by the appellant in the

manufacture of fertilizer and ammonia. It is immaterial that

a fraction of such procured Naphtha had to be used for

generation of electricity which was also mostly used in the

manufacture of fertilizer and ammonia but a portion of 66 which had to be used in the chemical plant beside being

supplied to the Maharashtra State Electricity Board. If that

be the position, appellant would be entitled to avail the

benefit of concessional rate of duty in terms of the

exemption notifications alluded too hereinabove.

1. Though this would clinch the issue, nonetheless

we are of the view that it would be appropriate to render a

pronouncement on the question of limitation or the extended

period of limitation as well.

1. Pushpam Pharmaceuticals Company is a case

where the question which fell for consideration before this

Court was whether the revenue was justified in initiating

proceedings for short levy of duty by invoking the proviso to Section 11A of the Central Excise Act for the years 1978-79

to 1981-82. In that case, the department invoked the

extended period of limitation as according to it the duty was

short levied due to suppression of the fact that if the

turnover was clubbed then it would have exceeded Rs. 5

lakhs in which event it would have attracted regular duty.

Be it stated that appellant in that case manufactured an

item falling under tariff item 14-E as well as another item 67 under item 68 which was fully exempted from payment of

duty. The item manufactured under tariff item 14-E in each

year was less than Rs. 5 lakhs. Notification No. 111 of 1978

exempted the turnover of goods manufactured under item

14-E if it was below Rs. 5 lakhs. In such circumstances,

appellant had surrendered its license and it was cancelled.

Notices were however issued because according to the

revenue, if the turnover of the two items i.e. exempted under

item 68 for the years under consideration was clubbed

together with the turnover of item 14-E then it would have

exceeded Rs. 5 lakhs and the goods would have become

liable to duty. In the facts of that case, this Court held as

under:

1. Section 11-A empowers the Department to reopen proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being suppression of facts. The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless of course the context in which it has been used indicates otherwise. A perusal of the proviso indicates 68 that it has been used in company of such strong words as fraud, collusion or wilful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.

56.1. Thus, this Court was of the view that for

invoking the extended period of limitation, the act of the

assessee should be deliberate. Where facts are known to

both the parties, the omission by one to do what he might

have done and not that he must have done does not render

it suppression.

1. Similarly, in Nirlon Limited, this Court noted from

the facts of the case that the entire exercise was revenue

neutral and held that when the entire exercise was revenue

neutral, the appellant (assessee) could not have achieved any

purpose by evading payment of excise duty. Therefore, it was

not permissible for the respondent (revenue) to invoke the 69 proviso to Section 11A(1) of the Central Excise Act and apply

the extended period of limitation.

1. Reverting back to the facts of this case, it is

evident that all along appellant had furnished the requisite

particulars to the central excise authorities based on which

the jurisdictional officer had issued CT-2 certificates. On the

strength of such certificates, appellant had availed exemption

from payment of excise duty on the procured Naphtha which

was mostly used in the manufacture of fertilizer and ammonia.

Applicability of the exemption notifications is dependent on

interpretation of the expression intended for use used therein.

When the availing of exemption is dependent on interpretation

of a statutory notification, which interpretation we have

upheld, it cannot be said that the assessee (appellant herein)

had any intention to evade payment of excise duty. That apart,

we need to keep in mind that appellant is after all a central

government public sector undertaking. It is on record that

appellant receives subsidy to maintain the regulated price.

Whatever excise duty it would have had to pay had it not

been for the exemption notifications, would have been

reimbursed by the Central Government by way of subsidy. 70 Therefore, it is a clear case of revenue neutrality. In such a

case, as has been pointed out by this Court in Nirlon,

question of invoking the extended period of limitation does

not arise.

Conclusions

1. Therefore, we are of the considered opinion that

the appellant has to succeed both on merit as well as on

limitation.

1. Consequently, impugned orders-in-original dated

27.01.2010 and 04.02.2010 as well as the impugned order

passed by CESTAT dated 27.03.2012 are liable to be set aside.

In so far the Civil Appeal arising out of Special Leave Petition

(Civil) No. 21441 of 2013 is concerned, in view of the

conclusions reached hereinabove, the same has become

academic and hence would require no adjudication.

1. Consequently and in the light of the above, Civil

Appeal Nos. 2219-2220 of 2013 are allowed. Orders-in-

original dated 27.01.2010 and 04.02.2010 as well as the

impugned order of CESTAT dated 27.03.2012 are hereby

set aside. Civil Appeal No. _____ of 2026 (arising out of 71 Special Leave Petition (Civil) No. 21441 of 2013) is disposed

of in the light of the decision rendered in Civil Appeal Nos.

2219-2220 of 2013.

1. No Costs.

……………………………J.
[MANOJ MISRA]

                               ……………………………J.
                                  [UJJAL BHUYAN]

NEW DELHI;

MARCH 24, 2026.

72