MIS STEEL AUTHORITY OF INDIA LTD. ETC.versusCOLLECTOR OF CENTRAL EXCISE

           MIS STEEL AUTHORITY OF INDIA LTD. ETC.                                 A
                            v.
                 COLLECTOR OF CENTRAL EXCISE

                               JULY 30, 1996
                                                                                  B
              [S.P. BHARUCHA AND K.T. THOMAS, JJ.]

       Central Excise Rules, 1944 : Rules 192 and 196( l~Exemptio11
Notification No. 187 of 1961 dt. 23rd December 1961-:-Concessional rate of
duty on raw naphtha utilised for the manufacture of fe1tiliser-At Interim stage   C
refomzed gas vented out-Raw naphtha not reaching amonia plant-Imposi-
tion of excise duty on raw naphtha-Held, raw naphtha used for the purpose
and with the intention to manufacture fe1tilise1~Refonned gas vented out due
to operational reasons-Entitled to benefit under the exemption notification.

        Appellant-assessee was engaged in the manufacture of fertiliser by        D
using raw naphtha. By exemption notification no. 187 of 1961 dt. 23rd
 December, 1961, raw naphtha was excisable at a concessional rate of duty
for the manufacture of fertiliser. According to the Revenue, a substantial
quantity of raw naphtha was not used by the appellant in the manufacture
of fertiliser. Thus, a show cause notice was issued to the appellant for          E
payment of Excise Duty on quantities of raw naphtha not utilised for the
manufacture of fertiliser. On appeal, the Customs, Excise and Gold (Con·
trol) Appellate Tribunal relying upon Rule 196(1) of the Central Excise
Rules, 1944 upheld the order of the Collector of Central Excise (Appeals).
The Tribunal noted that the raw naphtha bad been burnt in the naphtha
reforming plant, did not reach the amonia plant as the reformed gas
                                                                                  F
vented out into the atmosphere; and that the quantity of raw naphtha not
used for the manufacture of fertiliser would not be given the concessional
rate of Excise Duty. However, the Tribunal while allowing an appeal
against a subsequent order of the Collector, expressed a contrary view that
the appellant in fact intended to use raw naphtha for manufacturing               G
fertiliser but for operational reasons it became necessary to vent out the
reformed gas. Aggrieved by the order of the Tribunal the present applals
were preferred by the assessee.

      Allowing the appeals, this Court                                            H
                                   163
    164                  SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A         HELD : 1.1. The benefit of Exemption Notification No. 187 of 1961
    dt. 23rd December 1961 is available to the appellant in regard to the raw
    naphtha that it utilised in its plant for the manufacture of fertiliser but
    which, for reasons over which it had no control, did 'lot in fact result in
    the manufacture of fertiliser but had, at the interim stage of reformed gas,
    to be vented out. [168-F]
B
           1.2. The Exemption Notification required proof that the raw naphtha
    was "intended for use" in the manufacture of fertiliser and not that the raw
    naphtha was used in the manufacture of fertiliser. Duty at the full rate on
    the raw naphtha would be leviable only if it could not be shown to have
C   been used for the purpose and with the intention of manufacturing fer·
    tiliser. Thus, the Tribunal erred in holding in its first order that it was
    requisite that it should be proved that raw naphtha had been actually used
    in the manufacture of fertiliser. [168-A-D]

          1.3. There can be no doubt that the raw naphtha that was fed by the
D appellant into its plant was for the purpose and with the intention of
    manufacturing fertiliser and that it was only because of supervening
    circumstances, namely, the low, uncertain and fluctuating availability of
    power, that the reformed gas produced during the interim stage of
    manufacture had to be vented out. Thus, the Tribunal was justified in
E   expressing its disagreement in the second order with the view taken in the
    first order. [168-E-F]

          CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3406-11
    of 1990 Etc.

F         From the Judgment and Order dated 11.5.90 of the Customs, Excise
    and Gold (Control), Appellate Tribunal, New Delhi in A. Nos. E./283 to
    288/90-C Order No. 468-473 of 1990-C.

         V. Sreedharan, Sunil Kumar Jain, J atinder K. Bhatia, Sanjeev Bansal
    and K.J. John for the Appellants.
G
        Joseph Vellappally, R.P. Srivastava, P. Parmeswaran and V.K.
    Verma for the Respondent.

          The Judgmer.t of the Court was delivered by

H         BHARUCHA, J. These are appeals against orders of the Customs,
   STEELAlJfHOIU1Y OF INDIA LID. v. COLLECTOROFC.E (BHARUGIA,J.] 165


Excise & Gold (Control) Appellate Tribunal dismissing appeal filed by the A
present appellants, Steel Authority of India Ltd. (SAIL), before it.

       SAIL has a plant at Rourkela which manufactures fertilisers. For
such purpose SAIL uses raw naphtha. Raw naphtha was, at the relevant
time, exciseable at a concessional rate of duty in terms of an exemption
notification (No.187 of 61) dated 23rd December, 1961, as amended from           B
time to time. The concessional rate of duty therein was admissible
provided-

        "(i) it is proved to the satisfaction of an officer not below the rank
        of an Assistant Collector of Central Excise that such raw naphtha        C
        is intended for use in the manufacture of fertiliser; and

        (ii) the procedure set out in Chapter X of the Central Excise Rules,
        1944 is followed."

It was the case of the Revenue that a substantial quantity of raw naphtha        D
was not, in fact, used by SAIL in the manufacture of fertiliser. SAIL was,
therefore, served with show cause notices demanding amounts of excise
duty on quantities of raw naphtha allegedly not utilised for the manufacture
of fertiliser. SAIL's explanation in that behalf, in the words of an Assistant
Collector, read :
                                                                                 E
        "The assessee contended that the consumption of raw naphtha was
        more due to abnormal operating conditions such as low load
        operation, interruption in the plant operations due to low, uncer-
        tain and fluctuating availability of power. It was stated that the
        consumption of naphtha was further high because gases produced           F
        (out of raw naphtha) had to be vented due to acute power crisis
        causing interruption/stoppages of down stream units of the plant.
        It was submitted that the two naphtha reforming plants have
        provisions in the system for automatic venting of gases, in the event
        gas formed cannot travel forward due to non-availability of power
        for operating the down stream plants, and excessive pressure build G
        up. On many occasions gases are required to be vented out from
        the naphtha reforming plant when the said gases cannot be sent
        to down stream plants due to non-availability and law, interrupted
        and uncertain power supply or any other operational or main-
        tenance problems in the plant. Moreover, naphtha reforming H
    166                    SUPREME COURT REPORTS [1996] SUPP. 4 S.C.R.

A             plants have to be kept hot for preventing damages to the equip-
              ments, Reformer furnaces and catalysts in particular. Under the
              circumstances, of severe power shortages/restriction there was no
              production of Ammonia on many days. However, considering the
              safety of the equipments and life of refractory furnaces and
              catalysts of the plant, naphtha had to be consumed on those days,
B
              When there was no production of Ammonia. Naphtha consumed
              for the gases vented out during those days when there was no
              production of Ammonia, was essential for keeping the naphtha
              reforming plant in operational fitness and safe condition so that
              the plant could be lined up for production of Ammonia and
c             fertiliser at any time in the subsequent period depending on powe!
              availability."

         The matter first came before the Tribunal in relation to an order
  passed by the Collector of Central Excise (Appeals), Calcutta, on 17th
D September, 1987. The Tribunal then placed reliance upon Rule 196(1) of
  the Central Excise Rules, which stated, "If any excisable goods obtained
  under rule 192 are not duly accounted for as having beeri used for the
  purpose and in the manner stated in the application ................. the applicant
  shall, on demand by the proper officer, immediatdy pay the duty le•iable
  on such goods." An exception was made in the said Rule in the case of
E excisable goods which were shown to the satisfaction of the proper officer
  to have been lost or destroyed by natural causes or unavoidable accident
  during transport. The Tribunal noted that it was not the case of SAIL that
  the concerned quantity of raw naphtha had been lost or destroyed. It had,
  in fact, been burnt in the naphtha reforming plant of SAIL for keeping it
F continuously   running so that the ammonia plant could be switched on
  immediately upon resumption of power supply. The gas produced by
  burning the concerned raw naphtha did not reach the ammonia plant as
  the reformed gas was vented into the atmosphere. This quantity of raw
  naphtha could not, in the Tribunal's view, be said to have been used for
  the manufacture of fertiliser. The provisions of Rule 196 of the Central
G Excise Rules require that excise duty at full rate should be paid on demand
  in respect of such raw naphtha as was found not to have been actually used
  in the manufacture of fertiliser. The quantity of raw naphtha in dispute did
  not satisfy both the conditions prescribed in the exemption notification and,
  as such, the concessional rate of excise duty was not available to it. The
H order of the Collector dated 17th September, 1967, was, therefore, upheld.
   SfEELAUfHORITYOFINDIALID.v. COLLECTOROFC.E. fBHARUCHA.J.] 167

                  ..
        In the second order of the Tribunal, which arose upon an order A
 passed by the Collector on 22nd September, 1989, the earlier order
 aforementioned was followed; but it was followed only because, as express-
ly stated, judicial propriety and discipline so required. The view expressed
by the Tribunal in the second order was contrary to that expressed in the
first order. The second order noted that there was no dispute that the raw B
naphtha, when it was procured by SAIL, was intended for use in the
manufacture of fertiliser but, for operational reasons, it became necessary
for SAIL to vent out the reformed gas produced out of the raw naphtha
concerned before it could be fed into the ammonia plant in the stream of
production of fertiliser. The stand of SAIL that in the then prevailing
circumstances this venting of reformed gas was an unavoidable technologi- C
cal necessity had not been denied by the Revenue. The Tribunal noted that
it had had occasion to deal with cases where fertiliser plants, before being
commissioned, had necessarily to be put through pre-commissioning trial
runs and it had been held that, though the use of concessional inputs did
not result in the production of fertiliser, such inputs should be deemed to D
have been used in the manufacture of fertiliser. The Ministry of Finance
had, in a circular dated 22nd July, 1974, also made it clear to Excise
Collectors that naphtha used during trial runs and commissioning of fer-
tiliser plants was eligible for the excise duty concession. In the view of the
Tribunal in the second order, the principle would apply. It said :
                                                                              E
        "If venting out the reformed gas, produced out of the concessional
        rated naphtha was a technological necessity when the fertiliser
        plant itself could not be operated due to lack of adequate power
        supply - and, there is no dispute on this - we do not see why such
        use of naphtha cannot be termed to be use in the manufacture of F
        fertiliser though no fertiliser was, in fact, produced, There is no
        allegation that this naphtha was misll,ed or utilised in production
        of something for which exemption was not provided. We feel that
        the subject notifications should be interpreted in a liberal spirit,
        looking to the object of the notification viz., reducing the cost of
        inputs for fertilisers, as indeed the Tribunal did when it held that G
        use of naphtha is pre-commission trials, not resulting in production
        of fertiliser would be eligible for the benefit of the relevant notifica-
        tions."

     In our opinion, the Tribunal was right when it expressed it dis-         !-Ji
    168                   SUPREME COURT REPORTS [1996] SUPP. 4S.C.R.
                                                             r
A   agreement in the second order with the view taken in the first order.

            It is important to note that the exemption notification required proof
    that the raw naphtha was "intended for use" in the manufacture of fertiliser
    and not that the raw naphtha was used in the manufacture of fertiliser. Due
    emphasis has to be given to the clear language of the first condition of the
B   exemption notification and its effect cannot be nullified by an interpreta-
    tion placed on the second condition. Both conditions must be so read as
    to give full effect to the clear language of the first condition. The emphasis
    in this behalf upon Rule 196 in the first order of the Tribunal appears to
    us misplaced. Rule 196 says that if any excisable goods obtained under Rule
    192 are not accounted for as having been used for the purpose and in the
c   manner required, full exise duty thereon is payable. It does not appear to
    be correct to hold, as the Tribunal did in the first order, that this meant
    that it was requisite that it should be proved that the raw naphtha had been
    actually used in the manufacture of fertiliser. In the context, what was
    required to be shown was that the raw naphtha was used for the purpose
D   and with the intention of manufacturing fertiliser. Duty at the full rate on
    the raw naphtha would be leviablc only if it could not be should to have
    been used for the purpose and with the intention of manufacturing fer-
    tiliser.

            There can be no doubt that the raw naphtha that was fed by SAIL
E   into its plant was for the purpose and with the intention of manufacturing
    fertiliser and that it was only because of supervening circumstances, name-
    ly, the low, uncertain and fluctuating availability of power, that the
    reformed gas produced during the interim stage of manufacture had to be
    vented out. The benefit of the exemption notification is, therefore, available
    to SAIL in regard to the raw naphtha that it utilised in its plant for the
F   manufacture of fertiliser but which, for reasons over which it had not
    control, did not, in fact, result in the manufacture of fertiliser but had, at
    the interim stage of reformed gas, to be vented out.

          In the result, the appeals are allowed and the judgments and orders
    of the Tribunal under appeal are set aside. The appeals filed by the
G
    appellant, SAIL, before the Tribunal against the orders of the Collector of
    Central Excise (Appeals), Calcutta, are allowed.

          There shall be no order as to costs.

    S.V.K.I.                                                     Appeals allowed.