INDIAN FARMERS FERTILISER COOPERATIVE LTD.versusCOLLECTOR OF CENTRAL EXCISE, AHMEDABAD

        INDIAN FARMERS FERTILISER COOPERATIVE LTD.                               A
                                       v.
         COLLECTOR OF CENTRAL EXCISE, AHMEDABAD

                                JULY 31, 1996

               [S.P. BHARUCHA AND K.T. THOMAS, JJ.]                              B

        Central Excises & Salt Act, 1944 :

      First Schedule, Item 6-Raw naphtha-Exemptio11 Notification No.
187/61 presC1ibing concessional rate of duty on raw naphtha used to produce      C
ammo11ia, which was used ill ma11ufacture of fC!tilisers---Appellant allowed
concessional rate of duty on raw naphtha used to produce anunonia which
was directly utilised in urea plant but required to pay duty at full rate 011
naphtha used to produce ammonia which was used in off-site plants, namely,
water treatnient, steanl generation, inert gas generation and effluent treallnent
plants-Held, these off-site plants are a necessary pmt of the process of D
manufacture of urea, a11d raw naphtha used in mam1facture thereof is entitled
to duty exemption.

      The Central Government, by Exemption Notification No. 187/61,
prescribed concessional rate of duty on raw naphtha falling under Item           E
No. 6 of the First Schedule to the Central Excises and Salt Act, 1944 and
being utilised in the manufacture of ammonia provided such ammonia was
"used elsewhere in the manufacture of fertilisers".

      The appellant, a manufacturer of urea, obtained raw naphtha at
concessional rate of duty and used the same for producing ammonia,               F
which, in turn, was used, partly in the urea plant, and partly in the off-site
plants, namely, the water treatment plant, steam generation plant, inert
gas generation plant and effiuent treatment plant, all of which, as claimed
by the appellant, were part of the integral process of the manufacture of
urea.
                                                                                 G
       The appellant was required to pay excise duty at full rate on the raw
naphtha used for making ammonia, which had been used in the said
off-site plants, on the ground that such raw naphtha was not used in the
manufacture of fertiliser. In the appeal filed by the appellant, the Collector
of Central Excise and Customs accepted the case of the appellant in H
                                     183
    184                   SUPREME COURT REPORTS (1996J SUPP. 4 S.C.R.

A respect of the off-side plant except for the effiuent treatment plant. The
    Cnstoms, Excise and Gold (Control) Appellate Tribunal maintained the
    decision of the Collector as regards the effiuent treatment plant, but
    reversed his decision as regards off-site plants, and, thus, upheld the
    demand, Aggrieved, the appellants filed the present appeals.

B         Allowing the appeals, this Court

           HELD: 1.1. The raw naphtha use to produce ammonia which is used
    in the water treatment, steam generation, inert gas generation and effiuent
    treatment plants of the urea plant of the appellant is entitled to the
    exemption provided by the Exemption Notification No. 187/61 as amended
c   from time to time. [188-H; 189-A] .•

          1.2. The water treatment, steam generation and inert gas generation
    plants are part and parcel of the composite process that produces as: its
    end product urea, which is a fertiliser. These off-site plants are a necessary
D   part of the process of the manufacture of urea. The treatment of effiuents
    from a plant is also an essential and integral part of the process, of
    manufacture in the plant. The emphasis that has rightly been laid in recent
    year upon the environment and pollution control requires that all plants
    which emit effiuents should be so equipped as to rid the effiuents of
    dangerous properties. The apparatus used for such treatment of effiuents
E
    in a plant manufacturing a particular end product is part and parcel of
    the manufacturing process of that end product. The ammonia used in
    these plants must, therefore, be held to be used in the manufacture of urea
    and the raw naphtha used for the manufacture thereof is entitled to 1the
    duty exemption. [187-D; 188-E-G]
F
           Collector of Central Excise, Calcutta II v. M/s. Eastend Paper Industries
    Ltd., [1989] 4 SCC 244; Mis. J.K Cotton Spinning & Weaving Mills Co. Ltd.
    v. Sales Tax Officer, Kanpur and Anr., [1965] 1 SCR 900; Collector of Central
    Excise, New Delhi v. M/s. Balla1p1tr Industries Ltd., [1989] 4 SCC 566 and
G   Dy. CST v. Thomas Stephen & Co. Ltd., [1988] 2 SCC 264, relied on.

          1.3. There is no good reason why the exemption should be limited to
    the raw naphtha used for producing ammonia that is utilised directly in
    the urea plant. The Exemption Notification does not require that !lite
    ammonia should be used directly in the manufacture of fertilisers. It
H   requires only that the ammonia should be used in the manufacture of
   INDIAN FARMERS FERTILIZER CO.OP. LID.'· COLLECIOROFC.E lBHARUCHA,J.) 185

fertilisers. The Exemption Notification must be so construed as to give due   A
weight to the liberal language it uses. [187·D·E]

     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5437 of
1990 Etc.

     From the Judgment and Order dated 16.8.90 of the Customs, Excise         B
and Gold (Control), Appellate Tribunal, New Delhi in A. No. E/A. No.
2640 of 1989-C, Order No. 950/90-C.

        H.N. Salve and K.J. John for the Appellant.

        Joseph Vellapally, A.D.N. Rao and P. Parmeswaran for the Respon·      c
dent.

        The Judgment of the Court was delivered by

      BHARUCHA, J. These are appeals against orders of the Customs,           D
Excise and Gold Control Appellate Tribunal, New Delhi.

      The periods involved in the appeals are : 1st April, 1974 to 31st
December, 1982 in Civil Appeal No. 5437 of 1990 and January 1983 to
April, 1984 in Civil Appeal Nos. 5941-43 of 1990.
                                                                              E
     . By an Exemption Notification (No. 187/61) issued under the
provisions of Rule 8 of the Central Excise Rules, the Central Government
exempted raw naphtha falling under Item No. 6 of First Schedule to the
Central Excise and Salt Act, 1944, from the payment of excise duty in
excess of Rs. 4.36 per kilolitre at 15 degrees Centigrade. The Exemption
Notification applied "in respect of such Raw Naphtha as is used in the        F
manufacture of Ammonia provided such Ammonia is used elsewhere in the
manufacture of fertilisers" and the procedure set out in Chapter-X of the
said Rules was followed.

      The appellants manufacture urea, which is a fertiliser, at a plant at
Kaloi in the State of Gujarat and utilise for the purpose raw naphtha. The G
raw naphtha was obtained at the concessional rate of duty and was used
for producing ammonia which, in turn, was used, partly, directly in the urea
plant and, partly, indirectly, in the submission of the appellants, in the
production of urea by being employed in off-site plants, namely, the water
treatment plant, steam generation plant, inert gas generation plant and H
    186                   SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A   effluent treatment plant, all of which were part of the integral proces" of
    the manufacture of urea.

            The appellants, however, received show cause notices for the periods
    aforementioned demanding excise duty at full rate on the raw naphtha used
    for making ammonia which had been used in the water treatment plant,
B   steam generation plant, inert gas generation plant, and effluent treatment
    plant on the ground that such raw naphtha was not used in the manufacture
    of feriilisers. The demand was confirmed. In appeal by the appellants, the
    Collector or Central Excise and Customs upheld the contention of the
    appellants insofar as the ammonia was used in the water treatment plant,
c   steam generation plant and inert gas generation plant. This was on the basis
    that the inert gas generated in the inert gas generation plant was required
    for purging the pipelines and other process equipment of the ammonia
    plant every time it had to be started or shut and, therefore, the process of
    inert gas generation had to be treated as an integral part of the process of
D   the manufacture of ammonia, which, in turn, was used for the manufacture
    of fertilisers. The appellants required water of the high degree of purity in
    the high pressure boilers and heat exchangers in the ammonia and urea
    plants. Ammonia was used therein for purifying the water. The use of
    ammonia in the water treatment and steam generation plants was, there-
    fore, also an integral part of the process of manufacture of fertilisers.
E   Insofar as the effluent treatment plant was concerned, however, the Col-
    lector took the view that effluents were waste produced after the fertilisers
    had been manufactured. The effluents were treated for reasons of hygiene
    and pollution. Their treatment could not be said to be directly linked to
    the process of manufacture of fertilisers and the effluent treatment plant
    could not be said to be an integral part of the process of manufacture of
F
    fertilisers. The demand upon the appellants, insofar as it related to the
    effluent treatment plant, was, therefore, upheld.

           The excise authorities and the appellants filed appeals before the
    Tribunal. The Tribunal reversed the decision of the Collector in so far as
G   it held that the off-site plants, other than the effluent treatment plant, were
    a part of the process of manufacture of fertilisers. The Tribunal held that
    ammonia was used for the maintenance of the plant and equipment meant
    for testing and commissioning the plant and could not be said to be utilised
    in manufacture. Similarly, the purpose of the water treatment being essen-
H   tial for the protection of the boiler and other process equipment from
   INDIAN FARMEaS FERTILIZER CO.OP. LTD.'· COLLF.c1DR OF CE. (BHARUCHA,J.)   187

corrosion, formation of scales, etc., the ammonia used for the purpose A
could not be said to be used in !he manufacture of fertiliser. The view of
the Collector, in so far as the effluent treatment plant was concerned, was
upheld.

        Emphasis was laid, and rightly, by learned counsel for the appellants
on the phraseology used in the Exemption Notification. The exemption is
                                                                                   B
made available to such raw naphtha as is used in the manufacture of
ammonia provided such ammonia is used elsewhere in the manufacture of
fertilisers. That the raw naphtha is used to make ammonia is unquestioned.
The ammonia is used directly in the manufacture of fertilisers; the raw
naphtha so used is, it is not disputed, eligible to the exemption. The             c
question is whether the ammonia used in the off-site plants is also ammonia
which is "used elsewhere in the manufacture of fertilisers". The water
treatment,- steam generation and inert gas generation plants are part and
parcel of the composite process that produces as its end product urea,
which is a fertiliser. These off-site plants are part of the process of the        D
manufacture of urea. There is no good reason why the exemption should
be limited to the raw naphtha used for producing ammonia that is utilised
directly in the urea plant. The Exemption Notification does not require that
the ammonia should be used directly in the manufacture of fertilisers. It
requires only that the ammonia should be used in the manufacture of                E
fertilisers. The Exemption Notification must be so construed as to give due
weight to the liberal language it uses. The ammonia used in the water
treatment, steam generation and inert gas generation plants, which are a
necessary part of the process _of manufacturing urea, must, therefore, be
held to be used in the manufacture of ammonia and the raw naphtha used
for the manufacture thereof is entitled to the duty exemption.
                                                                                   F

          For our conclusion we draw support from the judgment of this Court
in Collector of Central Excise, Calcutta-II v. M/s. Eastend Paper Industries
Ltd., [1989] 4 SCC 244, where it was held, "Where any particular process
........ is so integrally connected with the ultimate production of goods that,    G
but for that process, manufacture or processing of goods would be com-
mercially inexpedient, articles required in that process, would fall within
the expression 'in the manufacture of goods"'. This was a reiteration of the
view expressed in Mis. J.K Cotton Spinning & Weaving Mills Co. Ltd. v.
Sales Tax Officer, Kanpur and Another, [1965] 1 SCR 900. It was there held,        H
    188                   SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A   "The expression "ia the manufacture" takes in within its compass, all
    processes which are directly related to the actual production". In Collector
    of Central Excise, New Delhi v. M/s. Bal/a1pur lndustlies Ltd., [1984] 4 SCC
    566, the respondent manufactured paper and paperboard, "in the processes
    relating to which "sodium sulphate" is used in the chemical recovery cycle
B   of sodium sulphate which forms an essential constituent of sulphate cook-
    ing liquor used in the digestion operation". The Exemption Notification
    concerned provided exemption to goods which had used as raw material
    or component parts any goods (inputs) falling under Item 68 of the First
    Schedule to the Act from so much of the excise duty leviable thereon as
    was equivalent to the excise duty paid on the inputs. The Court quoted
c   what had been said in· Dy. CST v. 77wmas Stephen & Co. Ltd., namely,
    11
     Consumption must be in the manufacture as raw material or of other
    components which go into the making of the end product... .............." and
    observed that, correctly apprehended, that statement did not lend itself to
    the understanding that for something to qualify itself as a raw material it
D   had necessarily and in all cases to go into and be found in the end product.
    The Court also quoted with approval the case of Eastend Paper lndustlies
    Limited cited above.

          That leaves us to consider whether the raw naphtha used to produce
E   the ammonia which is used in the effluent treatment plant is eligible for
    the said exemption. It is too late in the day to take the view that the
    treatment of effluents from a plant is not an essential and integral part of
    the process of manufacture in the plant. The emphasis that has rightly been
    laid in recent years upon the environment and pollution control requires
    that all plants which emit effluents should be so equipped as to rid the
F   effluents of dangerous properties. The apparatus used for such treatment
    of effluents in a plant manufacturing a particular end product is part and
    parcel of the manufacturing process of that end product. That ammonia
    used in the treatment of effluents from the urea plant of the appellants
    has, therefore, to be held to be used in the manufacture of urea and the
G   raw naphtha used in the manufacture of such ammonia to be entitled to
    the said exemption.

            In the result, the appeals are allowed. The orders under appeal are
     set aside. It is held that the raw naphtha used to produce ammonia which
H    is used in the water treatment, steam generation, inert gas generation and
   IN DIAN FARMERS FERTILIZER OJ.OP. LTD. v. OJLLECIOROFCE (BHARUCHA, l.(   189

effluent treatment plants of the urea plant of the appellants is entitled to A
the exemption provided by the Exemption Notification No. 187/61 as
amended from time to time.

       There shall be no order as to costs.

R.P.                                                       Appeals allowed.       B