Does an excise exemption for goods intended for use require proof of actual use?

Paragraph 53This 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 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 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: 6. It is important to note that the exemption notification required proof that the raw naphtha was “intended for use” in the manufacture of fertiliser and not that the raw naphtha was used in the manufacture of fertiliser. Due emphasis has to be given to the clear language of the first condition of the exemption notification and its effect cannot be nullified by an interpretation placed on the second condition. Both conditions must be so read as to give full effect to the clear language of the first condition. The emphasis in this behalf upon Rule 196 in the first order of the Tribunal appears to us misplaced. Rule 196 says that if any excisable goods obtained under Rule 192 are not accounted for as having been used for the purpose and in the manner required, full excise duty thereon is payable. It does not appear to be correct to hold, as the Tribunal did in the first order, that this meant that it was a requisite that it should be proved that the raw naphtha had been actually used in the manufacture of fertiliser. In the context, what was required to be shown was that the raw naphtha was used for the purpose and with the intention of manufacturing fertiliser. Duty at the full rate on the raw naphtha would be leviable only if it could not be shown to have been used for the purpose and with the intention of manufacturing fertiliser. 7. There can be no doubt that the raw naphtha that was fed by SAIL into its plant was for the purpose and with the intention of manufacturing fertiliser and that it was only because of supervening circumstances, namely, the low, uncertain and fluctuating availability of power, that the reformed gas produced during the interim stage of manufacture had to be vented out. The benefit of the exemption notification is, therefore, available to SAIL in regard to the raw naphtha that it utilised in its plant for the manufacture of fertiliser but which, for reasons over which it had no control, did not, in fact, result in the manufacture of fertiliser but had, at the interim stage of reformed gas, to be vented out.

Paragraph 54Applying 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 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.