Exemption for "intended use" survives minor auxiliary diversion; revenue neutrality precludes invoking the extended limitation period.

The Appellant, a Public Sector Undertaking (PSU), manufactures urea and ammonia

During the period 1996–2005, it procured Naphtha at a nil rate of duty from HPCL under Exemption Notifications No. 75/84-CE and No. 4/97-CE, which granted exemptions for Naphtha "intended for use" in fertilizer manufacture

The Revenue conducted a scrutiny and alleged that Naphtha was used as fuel in a common steam generation plant, providing steam not only for fertilizers but also for turbo generators (power generation), heavy water plants, and chemical plants

The Revenue issued several show-cause notices (SCNs) invoking the extended period of limitation, asserting that the Appellant suppressed the "actual use" of Naphtha

The adjudicating authority confirmed the duty demand and penalties, and the CESTAT affirmed the duty and penalty under Section 11AC of the Central Excise Act, 1944, holding that the recipient must prove actual use rather than intended use

1. Whether the exemption under Notifications No. 75/1984-CE and No. 4/1997-CE is contingent upon the "actual use" of Naphtha or its "intended use" at the time of procurement

2. Whether the Revenue was justified in invoking the extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act against a PSU in a revenue-neutral situation

The Court applied Notifications No. 75/1984-CE and No. 4/1997-CE, which exempt Naphtha cleared for "intended use" in fertilizer or ammonia manufacture

It relied on the precedent in Steel Authority of India v. Collector of Central Excise, which established that "intended for use" does not require proof of "actual use" if the goods were used for the stated purpose with the requisite intent

The Court also applied the principle from State of Haryana v. Dalmia Dadri Cement Limited that "for use" means "intended for use"

Regarding limitation, it applied the proviso to Section 11A(1) and Section 11AC of the Central Excise Act

principles from Pushpam Pharmaceuticals Co. v. Collector of Central Excise (requiring deliberate suppression)

Nirlon Limited v. Chief Commissioner of Excise (revenue neutrality precludes the extended period of limitation)

The Court observed that because Naphtha and natural gas were simultaneously fed into a common boiler, it was impossible to distinguish which fuel generated steam for specific units

following Steel Authority of India, the Court held that the "intended use" condition is satisfied if the Naphtha is used for the purpose of manufacturing fertilizer, even if technical compulsions result in minor diversions (e.g., electricity generation or venting gas)

The Court rejected the CESTAT’s narrow interpretation that the recipient must prove exclusive actual use

On limitation, the Court emphasized that the Appellant is a PSU receiving subsidies from the Central Government; any duty paid would be reimbursed, making the situation revenue-neutral

Under Nirlon, such neutrality negates any "intent to evade duty."

Furthermore, as the Appellant followed Chapter X procedures and obtained CT-2 certificates from Revenue officers who were aware of the plant’s dual-fuel setup, there was no deliberate suppression of facts

The Court held that the Appellant succeeded on both merit and limitation

It ruled that the "intended use" requirement for the exemption was satisfied despite the simultaneous use of Naphtha in a utility plant

the invocation of the extended period of limitation was declared invalid because the Appellant, as a PSU in a revenue-neutral scenario, lacked the mala fide intent to evade duty required by the proviso to Section 11A(1)

All confirmed duties, interest, and penalties were quashed