Full Judgment Text
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PETITIONER:
M/S. INDIAN PETROCHEMICALSCORPORATION LIMITED
Vs.
RESPONDENT:
COLLECTOR OF CENTRAL EXCISE.VADODARA
DATE OF JUDGMENT: 05/03/1997
BENCH:
CJI, A.M. AHMADI, SUJATA V. MANOHAR
ACT:
HEADNOTE:
JUDGMENT:
J U D G M E N T
Mrs. Sujata V. Manohar, J.
The appellant is a Government of India Undertaking. The
appellant is engaged,, inter alia, in the manufacture of
Ethylene, Propylene, Benzene, Toluene and other products
falling under Chapters 27 and 29 of the Central Excise
Tariff Act, 1985.
At the material time the appellant obtained raw naphtha
from the Refinery in terms of Notification No.27/89-C.E.
dated 1.3.1989. Under this notification, raw naphtha falling
under sub-heading No.2710.14 of the Schedule to the Central
Excise Tariff Act, 1985 intended for use in the manufacture
of products specified in the table annexed to the said
notification, is exempt from payment of so much of the duty
of excise leviable thereon as is in excess of the amount
calculated at the rate of Rs.60 per Kilolitre at 15 degree
Centigrade on the quantity of naphtha consumed in the
manufacture of the said products. The table of products
which is annexed to the notification, inter alia, covers
Ethylene, Propylene, Butadiene, Benzene, Toluene and Para-
xylene which are the products manufactured by the appellant
from raw naphtha obtained by the appellant under the
concessional rate of excise duty under the above
notification. According to the appellant it has not violated
any term of this notification.
The text of the notification is as follows:
"Concessional rate on naphtha used
in the manufacture of specified
chemicals. In exercise of the
powers conferred by sub-section (1)
of section 5A of the Central
Excises and Salt Act, 1944 (1 of
1944), the Central Government,
being satisfied that it is
necessary in the public interest so
to do, hereby exempts raw naphtha,
falling under sub-heading
No.2710.14 of the Schedule to the
Central Excise Tariff Act, 1985 (5
of 1986), intended for use in the
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manufacture of the products
specified in the Table hereto
annexed from so much of the duty of
excise from so much of the duty of
excise leviable thereon as is in
excess of the amount calculated at
the rate of Rs.60 per kilolitre at
15 c on the quantity of naphtha
consumed in the manufacture of the
said products:
Provided that where the use is
elsewhere than in the factory of
manufacture the procedure set out
in Chapter x of the Central Excise
Rules, 1944 is followed.
Explanation:-
1. The amount of naphtha consumed
in the manufacture of the products
shall be calculated by subtracting
from the quantity of naphtha
received by the factory
manufacturing the products the
quantity of naphtha returned by the
factory to a refinery, declared as
such under sub-rule (2) of rule 140
of the Central Excise Rules, 1944.
2. In cases where certain goods
which are incidental, inevitable,
or involuntary to the process of
manufacture the products specified
in the said Table are produced in
the course of the manufacture, the
exemption under this notification
shall not be denied for the reason
that the said goods are not
products specified in the said
Schedule.
-----------------------------------
TABLE
-----------------------------------
1. Ethylene
2. Propylene
3. Butadiene
4. ..........
5. ..........
6. Benzene
7. Toluene
8. Para-xylene
-----------------------------------
According to the appellant the entire quantity of raw
naphtha obtained by it is subjected to thermal cracking and
is further subjected to fraction and other processes to
extract or manufacture these products. At an intermediate
stage of manufacture, one of the byproducts obtained is
pyrolysis Gasolene. Pyrolysis Gasolene is further processed
by the appellant to obtain Benzene and Toluene which are
products enumerated in the Table. The residue left after
this manufacture is further processed to produce petroleum
Resins. Petroleum Resins are not listed in Table. What is
left over is returned to the refinery.
The Collector, Central Excise held that the entire
quantity of pyrolysis Gasolene which was presumed by him to
be raw naphtha, was not entitled to concessional rate of
duty as it was used for the manufacture of Petroleum Resins.
He levied a duty of Rs.24,41,99,988.77, ordered confiscation
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of land, building, plant, machinery with option to the
appellant to redeem them on payment of Rs.1 lac and imposed
a penalty of Rs.5 crores.
In appeal the Tribunal held that Pyrolysis Gasolene
used for manufacture of Benzene and Toluene was entitled to
concessional rate of duty. But the residual Pyrolysis
Gasolene used for the manufacture of Petroleum Resins was
not so entitled. It reduced the duty to Rs.4.36 crores and
reduced the penalty to Rs.10 lacs. The present appeal is
from this order.
Broadly speaking, the process of manufacture adopted by
the appellant is as follows:
Raw Naphtha which is obtained by the appellant at a
concessional rate of duty under the above notification is
cracked at high temperature as a result of which (1)
olefenic rich gas (2) pyrolysis fuel oil and (3) pyrolysis
gasolene are produced. Out of these olefenic rich gas is
further processed for the purpose of obtaining ethylene,
butediene, propylene and other items enumerated in the
Table. Residual gas is flared while the residue is returned
to naphtha cracker. The products which are obtained by the
further processing of olefenic rich gas are all covered by
the table in the concession notification. Pyrolysis fuel oil
which is the second resultant of the thermal cracking
process is used internally as fuel and is also removed as
carbon black feed stock.
Upto this stage the respondent has accepted that the
appellant has complied with the requirements of the above
notification. The difficulty in the present case has arisen
on account of the third resultant of the thermal cracking
processing, namely, pyrolysis gasolene. Pyrolysis gasolene
which arises in the process of thermal cracking is further
processed by the appellant in order to obtain benzene and
toluene which are also enumerated items. Since 1984 the
appellant has put up a petroleum resin plant. After the
extraction of benzene and toluene, the residual pyrolysis
gasolene is further processed in the petroleum resin plant
of the appellant. The residual product is given a C8.C9 Cut
which ultimately results in the manufacture of petroleum
resins. Petroleum resins are not mentioned in the table
annexed to the above exemption notification.
According to the respondent, the appellant has diverted
pyrolysis gasolene for the manufacture of petroleum resins
and therefore, pyrolysis gasolene to the extent that it is
used for the manufacture of petroleum resins cannot be
granted concessional rates of excise duty Accordingly under
the impugned order of CEGAT, duty of excise must be
calculated on the balance of residue of pyrolysis gasolene
"diverted" for C8.C9 Cut and not on the entire pyrolysis
gasolene as earlier held by the department. As a result the
appellant has become liable to pay duty calculated
approximately at Rs.4.36 crores instead of
Rs.24,41,99,988.77 as earlier held by the department.
In order to decide whether the findings of Tribunal are
correct, we must examine the terms of the notification in
question. The notification exempts raw naphtha intended for
use in the manufacture of products specified in the table
attached to it from so much of the duty of excise as is in
excess of the amount calculated at the rate of Rs.60 per
kilolitre at 15 degree c. on the quantity of naphtha
consumed in the manufacture of the said products. It is an
accepted position that the appellant under the notification
for the manufacture of products which are listed in the
table.
The only contention of the department is that the
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appellant has not used the entire quantity of raw naphtha
for this purpose. This contention does not appear to be
correct. The entire quantity of raw naphtha which was
obtained by the appellant under the exemption notification
is subjected to thermal cracking for the purpose of
obtaining ethyelene, butadiene, propylene and other items
which are incorporated in the said table. After the entire
quantity of raw naphtha is subjected to thermal cracking,
three items emerge; olefenic rich gas, pyrolysis fuel oil
and pyrolysis gasolene. There is no way in which the
appellant could have avoided this outcome. Out of these
resultants, olefenic rich gas is required to be further
processed for the manufacture of items forming part of the
table. One of the other resultant products, namely,
pyrolysis gasolene is further processed to obtain some more
products which are listed in the table, namely, benzene and
toluene. For this processing of pyrolysis gasolene also the
department has no objection because as a result of
processing of pyrolysis gasolene the products which are
obtained are listed in the table.
However, the further processing of residual pyrolysis
gasolene after extraction of benzene and toluene in the
petroleum resin plant of the appellant is objected to by the
department. This further processing of pyrolysis gasolene
residue results in production of petroleum resins which are
not enumerated in the said table. There is no dispute that
on petroleum resins so manufactured the appellant is paying
duty of excise. The only dispute is as to the duty of excise
to be levied on pyrolysis gasolene residue which is
processed in the petroleum resin plant of the appellant to
manufacture resins. According to the respondent the portion
of the residual pyrolysis gasolene consumed in the
manufacture of petroleum resins should have been returned to
the refinery.
In the first place the contention of the respondent
that the appellant has diverted raw naptha to the
manufacture of petroleum resins is not correct. What the
appellant obtained under the exemption notification was raw
naphtha which was subjected to thermal cracking. The entire
quantity of raw naphtha so obtained was subjected to
processing for the purpose of obtaining items enumerated in
the table. The appellant did not set apart any quantity of
raw naphtha for the purpose of obtaining petroleum resins.
It has merely subjected the residual pyrolysis gasolene to
further processing in the petroleum resin plant for the
manufacture of petroleum resins. This residual pyrolysis
gasolene cannot be equated with raw naphtha which was
obtained at concessional rate of duty. Explanation 2 of the
notification provides that in cases where certain goods
which are incidental, inevitable or involuntary to the
process of manufacture of the products specified in the said
table are produced in the course of manufacture the
exemption under this notification shall not be denied on the
ground that these goods are not products specified in the
said Schedule. In fact, the respondent has issued a
clarification with the concurrence of the Ministry of Law
bearing G.I.(D.R. & D.) F.No. 03/15/72-Cx.3 dated 26.3.1976
setting out as follows:
"..........it is clarified that
when raw naphtha is intended for
use in the manufacture of any one
or more of the products specified
in the Schedule appended to the
notification the production of
other goods which are
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incidental/inevitable/involuntary
in such production would not
disturb the scheme of exemption and
that the whole of the raw naphtha
would be deemed to have been used
in the manufacture of the product
for the manufacture of which raw
naphtha was obtained.
In this connection. our attention is drawn to a
decision of this Court in the case of State of Haryana v.
Dalmia Dadri Cement Ltd. (1987 (Supp) SCC 679). In that
case, cement required for use in the generation or
distribution of electrical energy was exempted from sales
tax. The Punjab State Electricity Board had obtained the
cement and given certificates that it was for use in the
generation or distribution of electrical energy. The Court
said that the mere fact that some of the cement supply was,
in fact, used by the Board for activities not directly
connected with the generation or distribution of electrical
energy cannot make any difference to the availability of the
exemption. The intention of the board was that the cement
was directly connected with the generation or distribution
of electrical energy.
In the present case, the entire raw naphtha which is
obtained at concessional rates of duty is made use of for
the purpose of obtaining products permitted under the said
exemption notification. Only some of the processed residue
is used for the manufacture of other products. There is,
therefore, no, violation in the present case of the
exemption notification.
In the case of m/s. Steel Authority of India Ltd. v.
Collector of Central Excise (C.A. Nos.3406-11/90 with
C.A.No. 3178/90 decided by this Court on 30-7-1995, S.P.
Bharucha and K.T. Thomas, JJ.) raw naphtha was subjected to
a concessional rate of duty under an exemption notification
provided that it was intended for use in the manufacture of
fertilizers. Raw naphtha which was so obtained by SAIL was
according to the revenue not used entirely for the
manufacture of fertilizers. According to SAIL, because of
abnormal operating conditions there was excessive
consumption of raw naphtha on account of low load operation,
interruption in the plant operations due to low, uncertain
and fluctuation availability of power. Also consumption of
naphtha was further high because gases produced out of raw
naphtha had to be vented due to acute power crisis causing
interruption/stoppages of down stream units of the plant.
The Court said that although raw naphtha for reasons beyond
the control of SAIL did not, in fact, result in the
manufacture of fertilizer and had to be vented at an interim
stage, nevertheless it could not be vented at an interim
stage, nevertheless it could not be said that SAIL had
violated any condition of the exemption notification because
raw naphtha which was fed by SAIL into its plant was for the
purpose and with the intention of manufacturing fertilizers.
It was only because of supervening circumstances that the
reformed gas produced during the interim stage of
manufacture had to be vented out.
In the present case, pyrolysis gasolene is an
incidental product which has been further processed to
obtain petroleum resin. This cannot be considered as a
diversion of raw naphtha obtained at concessional rates for
manufacture of other items.
In this connection, the appellant has drawn our
attention to another exemption notification being
Notification No.28/89-C.E. also dated 1.3.1989 which is as
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follows :
"Exemption of goods other than
blended or compounded lubricating
oils and greases. -- In exersise of
the powers conferred by sub-section
(1) of section 5A of the Central
Excises and Salt Act, 1944 (1 of
1944), the Central Government,
being satisfied that it is
necessary in the public interest so
to do, hereby exempts goods (other
than blended or compounded
lubricating oils and greases)
falling under Chapter 27 of the
Schedule to the Central Excise
Tariff Act, 1985 (5 of 1986)
produced in a factory and--
(a) utilised in the factory in
which the said excisable goods are
produced, for the manufacture of
other goods or as fuel for such
manufacture (excluding fuel used
for any internal combustion engine)
or both: or
(b) allowed to escape in the
atmosphere by flare system of
otherwise;
from the whole of the duty of
excise leviable thereon which is
specified in the said Schedule.
Under this notification pyrolysis gasolene which falls
under Chapter 27 is produced in the appellant’s factory and
it is utilised for the manufacture of goods. As such it
would be exempt from the whole of the duty of excise
leviable thereon assuming that any duty of excise is
leviable on it. Therefore, we fail to see how any duty of
excise can be levied on any part of pyrolysis gasolene
manufactured in the factory of the appellant.
Pyrolysis gasolene being an intermediate product which
is produced in the factory of the appellant, and it being
utilised for the manufacture of other goods, it would be
totally exempt from payment of excise duty under the second
exemption notification.
The appeal is, therefore. The appellant is not liable
to pay any duty of excise on pyrolysis gasolene. The
impugned order of Tribunal is, therefore, set aside. There
will, however, be no order as to costs.