Excise Duty Exemption Notifications Based On “Intended Use” Must Be Liberally Construed In Favour Of Assessee : Supreme Court

The Supreme Court has observed that excise exemption notifications based on “use” or “intended use” should be interpreted liberally in favour of the assessee. The Court held that once the goods are used for the intended purpose, the fact that a portion is incidentally used for other activities does not disentitle the assessee from claiming the exemption

A bench of Justices Manoj Misra and Ujjal Bhuyan set aside the excise duty demand against Rashtriya Chemicals and Fertilizers Limited, holding that the exemption could not be denied merely because a portion of the output derived from Naphtha procured for fertilizer manufacture was used for generating electricity for non-fertilizer purposes.

The appellant, Rashtriya Chemicals and Fertilizers Limited was procuring Naphtha at nil rate of duty from Hindustan Petroleum Corporation Limited (HPCL) by claiming benefit of exemption under exemption notifications, after obtaining CT-2 certificates from the excise authorities and declaring that the input would be used in the manufacture of fertilizer or ammonia. The said Naphtha was also used along with the natural gas as fuel for the generation of steam in the steam generation plant.

The dispute arose after the revenue authorities alleged that some of the steam generated from Naphtha was used in non-fertilizer units and for electricity supplied to the grid, thereby violating the conditions of exemption. Based on this, multiple show cause notices were issued 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 notification.

Aggrieved by the findings of the CESTAT, which had largely upheld the demand, the Appellant moved to the Supreme Court.

Setting aside the demand, the judgment authored by Justice Bhuyan observed that indirect or ancillary use of the procured item does not defeat the exemption, especially in integrated industrial processes where precise segregation of input usage is impractical.

“…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...”, the Court observed.

“…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.”, the court added.

In support, reliance was placed on State of Haryana Vs. Dalmia Dadri Cement Limited, 1987 Supp SCC 679, where the 'cement' sold for the purpose of generation or distribution of electrical energy was exempted under Punjab General Sales Tax Act, 1948 to the assessee. The Court, therein held that the assessee would be entitled to the benefit of the exemption as the cement supplied was intended for use directly in the generation or distribution of electrical energy. The Court went on to held that despite some of the cement supplied was infact used for activities not directly connected with the generation or distribution of electrical energy, it would not make any difference regarding the availability of the exemption.

In terms of the aforesaid, the appeal was allowed, holding that the Appellant had procured the Naphtha intending to use for fertilizer manufacturing, entitling it a benefit of exemption from excise duty.

Cause Title: M/S. RASHTRIYA CHEMICALS AND FERTILIZERS LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX (LTU)

Citation : 2026 LiveLaw (SC) 295

Click here to download judgment

Appearance:

For Appellant(s) : Mr. Balbir Singh, Sr. Adv. Mr. Karan Sachdev, Adv. Mr. H.G. Dharmadhikari, Adv. Ms. Shivani Shah, Adv. Mr. Praveen Agnihotri, Adv. Mr. Rahul Krishna, Adv. Mr. Rajesh Kumar, AOR Mr. Devavrat Anand, Adv. Mr. Rajesh Kumar, AOR Ms. Lalita Phadke, Adv. Mr. Alekh Apurv, Adv. Mr. Mukesh Kumar Maroria, AOR

For Respondent(s) :Mr. M.H. Patil, Adv. Mr. Sandeep Narain, Adv. Ms. Manasi Patil, Adv. Mr. Viraj Reshamwalla, Adv. M/S. S. Narain & Co., AOR Mr. B. Krishna Prasad, AOR Mr. Vikramjit Banerjee, A.S.G. Mr. Gurmeet Singh Makker, AOR Mr. Siddharth Sinha, Adv. Mr. Shubhendu Anand, Adv. Mr. Devashish Bharukha, Sr. Adv. Mr. Rajeev Ranjan, Adv. Mr. Rajesh Kumar, AOR