M/s Rashtriya Chemicals And Fertilizers Limited vs Commissioner Of Central Excise And Service Tax (LTU)

Ujjal Bhuyan, J

Leave granted in Special Leave Petition (Civil) No. 21441 of 2013.

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.

Civil Appeal No. 2219 of 2013 arises out of the 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.

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.

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). 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.

Facts

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.

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.

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.

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.

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.

Appellant  preferred  appeal  before  the  CESTAT against the order-in-originaldated 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.

While the appeal was pending, fourteen more show  cause  notices  were  issued  by  the  department  to  the 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.

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.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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 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.

Aggrieved  thereby,  appellant  has  preferred  the two civil appeals being Civil Appeal Nos. 2219 of 2013 and 2220 of 2013.

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 the appeal did not disclose any substantial question of law, the High Court dismissed the said appeal.

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

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 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 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 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 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 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 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  Company (2018) 9 SCC 1, 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 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 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 Excise (1996) 5 SCC 484 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 Limited 1987 Supp SCC 679, 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 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 limitation by the respondent under the proviso to Section 11A(1) 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, Bombay (1995) Supp 3 SCC 462, 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 of the extended period of limitation. This Court in Nirlon Limited Vs. Chief Commissioner of Excise (2015) 14 SCC 798 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 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 the exemption notifications have not been fulfilled. Appellant 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-originaldated 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.

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 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 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.

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 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 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 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 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 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.

Submissions made by learned counsel for the parties have received the due consideration of the Court.

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 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 controlsystem in the steam generationplant 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 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 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:

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.

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 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.

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’.

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 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 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.

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 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 simultaneouslyin the steam generation plant to generate steam. However, the percentage of consumptionof 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 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:

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 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.

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 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 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 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, 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:

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 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.

Let us now have a broad overview of the relevant statutory framework.

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 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.

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 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.

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 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.

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 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 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.

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.

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.

We  may  now  turn  to  the  Central  Excise  Rules, 1944  which  has  since  been  replaced  by  the  Central  Excise Rules, 2002.

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:

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 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.

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, 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.

Rule 25 of the Central Excise Rules, 2002 deals with confiscation and penalty. Four conditions are mentioned 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.

An order under sub-rule (1) shall be issued by the Central  Excise  Officer,  following  the  principles  of  natural justice.

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, 2001. 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 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:

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 during handling or storage in the manufacturer’s premises.

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  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 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 was followed.

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  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 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.

No.

Chapter or heading No.

or sub- heading No.

Description of goods

Rate

Condi -tions

(1)

(2)

(3)

(4)

(5)

*            *               *               *                *             *               *                *

8.

27

Naphtha and Natural Gasoline Liquid for use in the manufacture of fertiliser or ammonia

Nil

3 and

4

*            *               *               *                *             *               *                *

ANNEXURE

Condition No.

Conditions

*            *               *               *                *             *               *                *

3.

The  exemption  shall  be  subject  to  proving to the satisfaction of an officer not below 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.

4.

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.

*            *               *               *                *             *               *                *

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.

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 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 or of the Rules made thereunder with the intent to evade payment of duty.

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 by an intent to evade payment of duty to attract the extended period of limitation.

Let us now examine some of the judgments cited  at  the  Bar  and  their  applicability  to  the  facts  of  the present case.

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, 1948. After noting that the importantwords 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 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.

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 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:

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.

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.

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 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.

Though this would clinch the issue, nonetheless we  are  of  the  view  that  it  would  be  appropriate  to  render  a pronouncementon the question of limitation or the extended period of limitation as well.

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 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:

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 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.

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 proviso to Section 11A(1) of the Central Excise Act and apply the extended period of limitation.

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. 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

Therefore, we are of the considered opinion that the appellant has to succeed both on merit as well as on limitation.

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.

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 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.

No Costs.