Holding

Only the portion of LSHS used as feed stock in fertilizer manufacture qualifies for full exemption under notifications 147/1974 and 75/1984, while LSHS used to generate steam is exempt only under notification 127/1988 from 1 March 1988 onward.

Summary

Gujarat Narmada Valley Fertilizers Co. used Low Sulphur Heavy Stock (LSHS) both as a feed stock in the partial oxidation process for producing liquid ammonia and as a fuel to generate steam for the same process. The company claimed full exemption from excise duty on the entire quantity of LSHS under three exemption notifications (Nos. 147/1974, 75/1984 and 127/1988). The Central Excise, Customs and Gold (Control) Appellate Tribunal held that only the portion used as feed stock qualified for complete exemption, while the portion used for steam generation did not. The Supreme Court examined the meaning of "feed stock" and the language of the notifications, concluding that only LSHS employed directly as feed stock is entitled to 100% exemption, whereas LSHS used to generate steam is exempt only under notification No. 127/1988 from 1 March 1988. Accordingly, the Court allowed the appeal relating to notification No. 127/1988 and dismissed the other appeals, granting partial relief to the appellant.

Issues considered

What is the meaning of 'feed stock' under the exemption notifications?
Does LSHS used to generate steam for fertilizer production qualify as feed stock for the purpose of exemption?
Which portions of LSHS are eligible for full exemption under notifications 147/1974 and 75/1984, and which are eligible only under notification 127/1988?

Legislation cited

Central Excise and Salt Act, 1944

Subjects

excise dutyexemption notificationlow sulphur heavy stockfeed stockfertilizer manufacturingCentral Excise Actinterpretation of statutes

Judgment

...._ ·au JARA T NARMADA VALLEY FERTILIZERS co . A
--= ~ v.
COLLECTOR OF CENTRAL EXCISE, VADODARA

JANUARY 18, 2001

[B.N. KIRPAL, RUMA PAL AND BRIJESH KUMAR, JJ.] B

... Excise Law:

Central Excises and Salt Act, 1944: Tariff Item Nos. IO, II-A and 27.13.
c
Exemption Notifications-Low Sulphur Heavy Stock (LSHS)-Exempted
from excise duty-Assessee manufactured fertilizers by using LSHS-First two
notifications exempted furnace oil and petroleum stock if used as feed stock
in the manufacture of fertilizers-Third notification exempted LSHS if used
as feed stock but subjected it to a lower rate of excise duty if used otherwise D
than as feed stock-Assessee used LSHS directly in manufacture offertilizers
and for manufacture of steam which in turn was used in manufacture of
fertilizers-Entitlement of assessee to benefit of notifications in respect of that
part of LSHS used in the production of steam-Held: Assessee entitled to
benefit of notification Nos. 14711974 and 7511984 in respect of that part of
LSHS used as feed stock for manufacture offertilizers and not for generation E
of steam-However, assessee entitled to benefit of notification No. 12711988
in respect of LSHS used for generation of steam w.ej. 1-3-1988-Exemption
Notifications Nos. 14711974, 7511984 and 12711988.

Words and Phrases:
F
"Feed stock"-Meaning of-In the context of Exemption Notifications
Nos. 14711974, 7511984 and 12711988.

The appellants manufactured fertilizers for which it used Low Sulphur
Heavy Stock (LSHS). There were three notifications of exemption from G
excise duty namely, Notifications Nos. 147/1974, 75/1984 and 127/1988.
The first two notifications exempted furnace oil and petroleum stock if they
were used as feed stock in the manufacture of fertilisers. The third notification·
exempted LSHS from excise duty if it was used as feed stock in the
manufacture of fertilizers but subjected it to a lower rate of excise duty if
it were not so used. H
447
).

448 SUPREME COURT REPORTS [2001] 1 S.C.R.

A The appellant used LSHS directly in the manufacture of fertilizers and
for manufacture of steam, which in turn was used in the manufacture of
fertilizers.
-JI. ---
The appellant claimed exemption from excise duty in respect of the
entire quantity of LSHS used for manufacture of fertilisers as well as steam.
B
.
But the Central Excise, Customs and Gold (Control) Appellate Tribunal held
that the appellant was not entitled to the benefit of the first two notifications
inasmuch as that part of LSHS, which had been used for producing steam
wculd not be regarded as having been used as feed stock. Hence this appeal.

Allowing the appeal in part, the Court
c
HELD: 1.1. The notifications clearly show that in the manufacture of
,..
fertilizers there may be more than one way in which Low Sulphur Heavy
Stock.(LSHS) may be used. It is only of LSHS is used as 'feed stock' that
...
there is a complete exemption from duty. [452-El
D 1.2. LSHS has been used in two ways. Firstly, it had been used as feed
stock in the oxidation process when along with furnace oil it came in contact
with oxygen and steam which resulted in gas with soot which was ultimately
subjected to further process before leading to liquid ammonia. Secondly, it ...,..
was used for adding to the coal which was burnt for boiling water which
E resulted in the production of steam which was also an essential part of the
process of manufacture of fertilizers but that by itself would not entitle the
appellant to the benefit of complete exemption from excise duty unless it can
be shown that LSHS has been used as feed stock in the manufacture. The
notifications clearly indicate that it is only in respect of the limited use of
LSHS as feed stock that complete exemption has been granted. LSHS used
F in the manufacture of fertilizers, but not as feed stock, was, however, subject
"'
to excise duty though at a lower rate. [453-A-CI

2. The very process of manufacture shows that LSHS, as a result of
chemical reaction, becomes gas which is subsequently purified resulting in
liquid ammonia which can be regarded as feed stock in contra-distinction to
G
LSHS which is burnt and as a result whereof steam is generated which in ..;
turn is used in the process. In the above-mentioned second case, LSHS is
used in the manufacture of ammonia but not as a feed stock. As such, benefit
of notification No. 127/1988 would be available to the appellant in respect of
.LSHS, which has been used for generating steam, and this will be with effect
H from 1-3-1988. In respect of the earlier period it is only that part of LSHS
GUJARATNARM. VALLEY FERT. CO. 1•. C.C.E. VADODARA [KIRPAL,J.] 449
which will be entitled to 100 per ~ent exemption from excise duty by virtue A
of notification No. 147/1974 and notification No. 75/1984 which has been
used as feed stock and not for the purpose of generating steam.1453-D-El

Fertilizer Corporation of India Ltd v. CCE, 120001 122 ELT 343,
referred to.
B
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2448 of 1992.

From the Judgment and Order dated 6.3.92 of the Central Excise, Customs
and Gold (Control) Appellate Tribunal, New Delhi in A. No. E/3482/87-C with
E/Cross/252/88-C in F.O. No. 74of1992-C.

With c
C.A. No. 9122of1994.

And

CA No. 3119 of2000.
D
With

CA Nos. 3166 and 3167 of2000.

~ Soli J. Sorabjee, Attorney General, Joseph Vellapally, R. F. Nariman, U.
K. Chaudhary, Tarun Gulati, Ms. Madhu Sweta, Ms. Jndu Malhotra, Sameer
Parekh, Ms. Deepamala Ranganathan, P. H. Parekh, Ambhoj Kumar Sinha, Ms. E
Nisha Bagchi, K. Swami, Rajiv Nanda and B. K. Prasad for the appearing
parties.

The Judgment of the Court was delivered by

KIRJ>AL,J. F
Civil Appeal Nos. 2448/92 and 9122/1994.

Interpretation of the exemption notifications relating to heavy petroleum
stock is for consideration in these appeals.

The appellants manufacture fertilizers. In the manufacture thereof apart G
_. from other items they also use Low Sulphur Heavy Stock (hereinafter referred
to as "LSHS") which is regarded as heavy petroleum stock in respect of which
exemption notifications have been issued.

The Gujarat Narmada Valley Fertilizers Co. Ltd. had applied in 1983 for
a licence in Form-L6 so as t_o obtain without payment of duty excisable goods, H
450 SUPREME COURT REPORTS [200 I] I S.C.R.

A namely, LSHS which was to be used for the industrial process of manufacture
of fertilizers. In the said application, it was stated that 30,000 metric tonnes
of LSHS was to be used as feed stock per month. The application also gave
the manner of manufacture and it was inter alia stated that Ammonia was
manufactured using furnace oil and LSHS as feed stock alongwith oxygen and
B steam by employing partial oxidation process. Explaining the process further,
it was stated that as a result of employing the said partial oxidation process,
gases are produced which are contaminated with soot. Thereafter, there are
stages at which the gases initially produced are purified and ultimately when
the impurities have been removed the gas is compressed and becomes liquid
ammonia. This liquid ammonia is then used for the manufacture of urea
C fertilizers.

According to the appellants, LSHS was used in twin fold manner - (a)
directly in manufacture of fertilizers and (b) for manufacture of steam which
in tum was used in manufacture of fertilizers.

D There are three notifications of exemption with which we are concerned
in the present cases. They are notification Nos. 147/1974, 7511984 and 127/
1988. It is not in dispute that the first two notifications, for the purpose of
these cases, are similar and therefore we need refer to only one of them
namely, notification No. 147/1974 which reads as follows:

E "Exemption to Furnace Oil and heavy petroleum stock if used as
feed stock in the manufacture of fertilizers:-

In exercise of the powers conferred by sub-Rule (I) of rule 8 of
the Central Excise Rules, 1944, the Central Government hereby exempts
furnace oil and heavy petroleum stock falling respectively under Item
F Nos. I 0 and 11 A of the First Schedule to the Central Excise and Salt
Act, 1944 (I of 1944) intended for use as feed stock in the manufacture
of fertilizers, from the whole of the duty of excise leviable thereon:

Provided that-
G (i) it is proved to the satisfaction of the Assistant Collector of
Central Excise that such furnace oil or heavy petroleum stock is
so used, and
(ii) the procedure set out in chapter x of the Central Excise Ru)es,
1944, is followed.''
H As far as notification No. 12711988 is concerned the relevant part,
GUJARAT NARM. VALLEY FERT. CO. v. C.C.E. VADODARA [KIRPAL, J.] 45]
..__ namely item Nos. 56 and 57 in the table of the said notification is as follows:- A
)t.

56. Residues of petroleum oils or of NIL Intended for use as feed
oils obtained from bituminous stock in the manufacture
minerals, including heavy offertilizers.
petroleum stock, low sulphur
heavy stock and other residual B
... fuel oils falling under heading
No. 27 .13 of the said Schedule. ·
57. Residues of petroleum oils or of Rs. 70 Intended for use otherwise
oils obtained from bituminous per than as feed stock in the
minerals, including heavy tonne manufacture of fertilizers. c
petroleum stock, low sulphur
heavy stock and other residual
+ fuel oils falling under heading
No. 27.13 of the said Schedule.

The case of the appellants is that LSHS has been used for the
D
manufacture of fertilizers. It is contended that with the help of LSHS steam
was produced which is an integral part in the process of manufacture of gases
which ultimately result in the formation of liquid ammonia. It is from liquid
ammonia that urea is ultimately being manufactured. Just as LSHS and furnace
o_il, when first reacted with oxygen steam results in the form of ammonia, E
similarly, steam also goes into the process of manufacture of liquid ammonia
and in production of steam LSHS is used and therefore the entire quantity
of LSHS was entitled to full exemption.

The revenue did not accept this contention. After show cause notice
had been issued and reply received, the appellants were asked to pay duty F
on the basis that they were not entitled to the benefit of the first two
notifications inasmuch as that part of LSHS which had been used for producing
steam would not be regarded as having been used as feed stock. Appeal to
the CEGAT being unsuccessful, the present appeals have arisen.
G
Learned counsel for the appellants in support of their submission that
they were entitled to the benefit of the said notifications Nos. 147/1974 and
75/1984 have strongly relied upon the decision of the Patna High Court in the
case of Fertilizer Corporation of India, Ltd. v. Collector of Central Excise,
Patna, reported in (2000] 122 EL T 343. In that decision, the Patna High Court
had come to the conclusion that even that portion of LSHS which had been H
452 Slll'REME COURT REPORTS [200 ! ] I S.C.R.

A used for generating stea·m which in turn had resulted in the manufacture of
liquid ammonia would be entitled to the benefit of the exemption notification. ~

Reading the three notifications, it is clear that LSHS is entitled to
exemption either wholly or in part if it is used in the manufacture of fertilizers.
The said entries 56 and 75 are similar to entries 25 and 26 of the exemption
B notification No. 75/1984 which after amendment inter a/ia related to furnace
oil. In item 25 of this notification there was complete exemption from duty in
relation to furnace oil if it was- "intended for use as feed stock in the
manufacture of fertilizers." Under Entry 26 duty of furnace oil was payable at
Rs. 64.10 per Kl. in respect of that furnace oil which was -"intended for use
C otherwise than as feed stock in the manufacture of fertilisers". At item Nos.
56 and 57 of the notification No. 127/1988 which had been quoted herein
atrove, the language is similar in respect of LSHS to that of furnace oil. Under
Entry 56 there is a complete exemption is respect of LSHS which is intended
for use as feed stock in the manufacture of fertilizers but if LSHS was intended
for use otherwise than as feed stock but in the manufacture of fertilizers duty
D at the rate of Rs. 70 per tonne had to be paid.

The aforesaid notifications clearly show that in the manufacture of
fertilizers there may be more than one way in which LSHS may be used. It
is only if LSHS is used as 'feed stock' that there is a complete exemption from
duty.
E
The question, therefore, arises as to what is 'feed stock'. Reference to
the Condensed Chemical Dictionary (Tenth Edition) by Gessner G. Hawley
defines feed stock as "Gaseous or liquid petroleum-derived hydro carbons or
mixtures of hydro carbons from which gasoline, oil fuel, petro-chemicals are
produced by thermal or catalytic cracking ....... " In McGraw Hill's Dictionary
F on Scientific and Technical Terms, feed stock has been defined as raw material
furnished to a machine for process. According to the Glossary of Petroleum
term as per the Indian Standards Institute feed stock means "primary material
introduced into a plant for processing".

G The aforesaid application for licence of Mis. Gujarat Narmada Valley
Fertilizers Co. Ltd. clearly indicated that LSHS was to be used as feed stock
and that was to be used alongwith oxygen and steam for employing partial
oxidation process. In the said application, it was not indicated that LSHS was
to be used in the production of steam which in turn was to be employed in
the manufacture of liquid ammonia. LSHS, according to the said application,
H was to be used as feed stock in the manufacture of fertilizers.
GU.IARATNARM. VALLEY FERT. C<! v. C.C.E. VADODARA [KIRPAL,J.] 453

As is evident from hereinabove, LSHS has been used in two ways. A
Firstly, it had been used as feed stock in the oxidation process when alongwith
furnace oil it came in contact with oxygen and steam which resulted in gas
with soot which was ultimately subjected to further process before leading
to liquid ammonia. Secondly, it was used for adding to the coal which was
burnt for boiling water which resulted in the production of steam which was B
also an essential part of the process of manufacture of fertilizers but that by
itself would not entitle them to the benefit of complete exemption from excise
duty unless it can be shown that LSHS has been used as feed stock in the
manufacture. The notifications clearly indicate that it is only in respect of the
limited use of LSHS as feed stock that complete exemption has been granted.
LSHS used in the manufacture of fertilizers, but not as feed stock, was C
however subject to excise duty though at a lower rate.

The very process of manufacture indicated hereinabove shows that
LSHS, as a result of chemical reaction, becomes gas which is subsequently
purified resulting in liquid ammonia which can be regarded as feed stock in
contra-distinction to LSHS which is burnt and as a result whereof steam is D
generated which in turn is used in the process. In the above-mentioned
second case, LSHS is used in the manufacture of ammonia but not as a feed
stock. As such, benefit of notification No. 127/1988 would be available to the
appellants in respect of LSHS which has been used for generating steam and
this will be with effect from 1st March, 1988. In respect of the earlier period, E
it is only that part of LSHS which will be entitled to I 00 per cent exemption
from excise duty by virtue of notification No. 147/1974 and notification No.
75/1984 which has been used as feed stock and not for the purpose of
generating steam.

For the aforesaid reasons, while I.A. No. 311995 in C. A. No. 9122/1994
is allowed and it is held that the appellants therein are entitled to the benefit F
of notification No. 127/1988 with effect from Isl March, 1988, the appeals are
dismissed with no order as to costs.

C. A. Nos. 3Jl9, 3166 and 316712000.

In these appeals, the facts are similar to Mis. Gujarat Narmada Valley G
_. Fertilizers Corporation Ltd. The only difference is in the manufacture of
fertilizers in respect of liquid ammonia it is Methonol which is produced. For
the reasons stated in our decision in C. A. No. 2448/1992 these appeals are
also dismissed in so far as LSHS is used for the production of steam.

V.S.S. Appeals partly al.lowed. H