CEA Nos.58 and 59 of 2004 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CEA.No. 58 of 2004 Date of decision 15.1.2009 M/s National Fertilizer Ltd., Naya Nanagal ...Appellant Versus Commissioner of Central Excise, Ludhiana ... Respondent. CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE H.S. BHALLA Present: Mr. Mr. Jagmohan Bansal ,Advocate for the appellant Mr.Gurpreet singh, Sr. Standing counsel (indirecdt taxation) for the respondents 1. Whether Reporters of local papers may be allowed to see the judgement ? 2. To be referred to the Reporter or not ? 3. Whether the judgement should be reported in the Digest ? M.M.KUMAR, J. M/s National Fertilizer Ltd. which is in appeal has invoked the powers of this Court under Section 35(G) of the Central Excise act,1944 (for brevity 'the Act') challenging order dated 29.9.2003 ( Annexure P.5) passed by the Central Excise and Service Tax Appellate Tribunal, New Delhi (for brevity 'the Tribunal') in two appeals namely E.A.No. 3301/98 NB(B) and EA No. 639 of 2000 NB(B). The appellants have filed two appeals namely CEA Nos. 58 and 59 of 2004 which are proposed to be decided by this common order as common question of law has been raised in these appeals. The appellant has claimed that following substantive questions of law would emerge from the order of the Tribunal: “ 1. Whether the Tribunal was correct in law in holding that the benefit of Exemption Notification No. 8/96-CE dated 23.7.1996 was not available to the assessee as the Ammonia produced CEA Nos.58 and 59 of 2004 2 from Naphtha was not used for the manufacture of fertilizer; 2. Whether on the facts and circumstances of the case, penalty under Rule 173Q(1) of the Central Excise Rules, 1944 was exigible on the assessee ?” In order to put the controversy in its proper prospective few facts may first be noticed. The appellant is engaged in the manufacture of fertilizer using Naphtha as input. The raw material 'Naphtha' is subject to central excise duty. However, there is a notification bearing No. 8/96-CE dated 23.7.1996 as amended by subsequent notification No. 4/97 dated 1.3.1997 stating that Naphtha is exempt from duty if its buyer uses it in the manufacture of 'Ammonia' or 'Fertilizer' subject to fulfillment of certain conditions. During the period July, 1996 to March, 1997 the appellant procured Naphtha and in terms of the provisions of the notification dated 23.7.1996 he availed the benefit of not paying any duty. It also followed the prescribed procedure for procuring duty free Naphtha. According to the claim made by the appellant for manufacturing process of fertilizer, ammonia is first manufactured from Naphtha and then ammonia is used for producing fertilizer. It is further claimed that during the continuous and integrated process of manufacturing two industrial products namely Ammonia Nitrate and Nitric Acid are also extracted in the intermediate process which are marketable. It is not disputed that during the period in question from July, 1996 to March, 1997 the appellants sold industrial products and used the other parts for manufacturing of fertilizer. Respondent no. 1 issued three show cause notices dated 25.3.1997, 19.6.1997 and 6.8.1997 (Annexure P.1 Colly.) raising demand of duty on Naphtha used in the manufacture of industrial products and CEA Nos.58 and 59 of 2004 3 restricted the benefit of exemption of duty to only such quantity of Naphtha which was used in the production of fertilizer. The claim of the petitioner that Naphtha has not been directly used in the production of industrial products but it was first converted into Ammonia was rejected. The aforementioned stand was taken by the appellants in their reply wherein a categorical stand was taken that Naphtha is first subjected to the process which result in production of ammonia and therefore the exemption would become available to the appellant at that stage itself. It was asserted that the requirement of exemption notification is that Naphtha must be used for production of ammonia or fertilizer and no further. Accordingly the respondent confirmed the demand and also imposed penalty of Rs. 10 lakhs. In respect of all the three show cause notices a common order was passed on 30.7.1998 ( Annexure P.3). The appellant challenged the order dated 30.7.1998 (P.3) before the Tribunal but on account of some technical objections, the matter could be heard only in the year 2003 and eventually vide a short order dated 29.9.2003 the appeal of the appellant was dismissed. The operative part of the order reads thus: “ We have considered the submissions of both the sides. It is not in dispute that the industrial products have been manufactured out of raw naphtha procured by availing the benefit of Notification. Once the Naphtha has been used in the manufacture of other products, the benefit of notification will not be available to the appellants. Accordingly, both the appeals are rejected.” The appellants filed another application under Section 35(C)(2) of the Act with a prayer for rectification of the mistake apparent on record of the CEA Nos.58 and 59 of 2004 4 order dated 29.9.2003 but the application was dismissed by stating that there was no mistake apparent on the face of the record. Mr. Jagmohan Bansal, learned counsel for the appellant has vehemently argued that the event when the duty becomes payable in respect of Naphtha would complete itself when it is subjected to any process which result into production of another product. According to the learned counsel it is not possible to produce fertilizer or Ammonia Nitrate or Nitric Acid without first producing Ammonia from Naphtha. He has maintained that once the afore-mentioned process is not disputed then the moment ammonia is produced the benefit contemplated by notification dated 23.7.1996 (as amended by notification dated 1.3.1997) becomes available. Accordingly, Naphtha which is otherwise excisable becomes duty free. Mr. Bansal has maintained that the revenue cannot take advantage of the fact that the by-product of Ammonia can further be processed to produce industrial product. According to the learned counsel ammonia or fertilizer are duty free if made from Naphtha and the beneficiary notification stand exhausted at that stage. In support of his submission, he has placed reliance on paras 9 and 11 of the judgement of Hon'ble the Supreme Court in the case of Gujarat State Fertilizer company v. C.C.E. (1997) 4 SCC 140. Mr. Gurpreet Singh, learned Senior Standing Counsel for the respondent has, however, argued that only a part of Naphtha would qualify for benefit contemplated by the notification dated 23.7.1996 as amended on 1.3.1997 (supra) because the object of the notification is to encourage the production of fertilizer. Learned counsel has maintained that once Naphtha is used for producing industrial product the basic object of the aforesaid notification would be defeated and it would attract excisable duty which the CEA Nos.58 and 59 of 2004 5 appellant has avoided to pay. Learned counsel has then argued that no exemption would be permissible for the industrial products which are sold in the market under the different brand name. However, he has remained unable to contradict the submission made by the counsel for the appellant that before any other process for production of any other industrial product is undertaken Naphtha is to be processed for producing Ammonia. After hearing learned counsel for the parties and perusal of the paper book with their able assistance we are of the view that this appeal deserves to be allowed and the question of law has to be answered in favour of the assessee and against the revenue. It would first be appropriate to consider the relevant extracts of the notification dated 23.7.1996 as amended on 1.3.1997 which are as under: “ In exercise of the powers conferred by sub section (1) of 'Section 5A of the Central Excise and Salt Act,1944 (1 of 1944), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts goods specified in column (3) of the Table hereto annexed (hereinafter referred to as the said Table) and falling within the Chapter, heading No. or sub heading No. of the schedule to the Central Excise Tariff Act,1985 (5 of 1986), (hereinafter referred to as the said Schedule), specified in the corresponding entry in column (2) of the said Table, from so much of the duty of excise leviable thereon which is specified in the said schedule, as is in excess of the amount calculated at the rate specified in the corresponding entry in column (4) of the said Table, subject to the conditions, if any, laid down in the corresponding entry in column (5) thereof or as mentioned in said column (5) and CEA Nos.58 and 59 of 2004 6 specified below the said table: Provided that the item No.17 of the Conditions below, wherever applicable in this notification, shall come into effect on and from the 1st day of August, 1996 TABLE Reference Chapter Description of Rate Condition 27.1 27 Naphtha and Natural ... Specified in item Gasoline Liquid for No.(3) and (4) of use in the manufacture conditions below fertilizer or ammonia Conditions: 3. The exemption shall be subject to proving to the satisfaction of an officer not below the rank of Assistant commissioner of Central Excise, that such goods are cleared for the intended use specified in column (3) of the said Table. 4. Where such use is elsewhere than in the factory of production, the procedure set out in Chapter X of the Central Excise Rules, 1944, is followed” A perusal of the aforesaid notifications show that exemption has been granted to the goods specified in column no.3 of the table and Naphtha is one of the items which has been described in chapter heading no. or sub heading no. 27 of the schedule to the Central Excise Tariff Act, 1985. The first condition for qualifying for exemption for excise duty is that Naphtha is exempt from duty if used in the manufacture of fertilizer or ammonia. Further condition nos. 3 and 4 would also show that it should be proved to the satisfaction of an officer of the rank of Assistant Commissioner of Central Excise or higher that such goods were cleared for the intended use specified in column no. 3 of the table which means for manufacture of CEA Nos.58 and 59 of 2004 7 fertilizer of ammonia. There is no dispute that the appellant had procured Naphtha in terms of the provisions of the aforesaid notifications without payment of due because the intended use of Naphtha was fertilizer or ammonia. It is also undisputed that the appellant had produced Ammonia from Naphtha. Once ammonia is produced from the input Naphtha then the benefit of the notifications must accrue to the appellant. In some what similar circumstances Hon'ble the Supreme Court in para 9 of the judgement in the case of Gujarat State Fertilizer (supra) has granted the benefit to the assessee. The relevant portion of the judgement reads thus: “9. In the light of these background facts on which there is no dispute the short controversy posed for our consideration will have to be 3625 resolved. We have, therefore, to turn to the concerned two notifications which are brought on the anvil of scrutiny before us. Notification No. 75 of 1984 dated 1-3-1984, as amended from time to time, sought to grant a concession in the rates of central excise duty as specified in the Schedule to the said notification on goods of the description specified in column (2) of the Table subject to intended use or condition as laid down in column (4) thereof. The Table to the said notification mentioned at Sl. No. 2 raw naphtha as the commodity on which concessional rate of duty was permitted subject to the condition mentioned in column (4) which provided that raw naphtha must be intended for use in the manufacture of fertilisers and ammonia. We are not concerned with the proviso to the said condition mentioned in column (4). Now a mere look at the said notification shows that when raw CEA Nos.58 and 59 of 2004 8 naphtha was utilised for manufacture of fertilisers and ammonia, it would earn the concessional rate of duty. It is not in dispute between the parties that raw naphtha which the appllellant purchased from the open market was in fact utilised by it in manufacture of ammonia even leaving aside the further question as to whether it was utilised for manufacture of any fertiliser. It is, therefore, difficult to appreciate as to how CEGAT could persuade itself to hold that because ammonia manufactured out of raw naphtha had resulted in molten urea which was not a soil fertiliser, the benefit of the aforesaid notification could not be made available to the appellant which had utilised raw naphtha in its Plant. Moment it was shown that raw naphtha was wholly utilised by the appellant for manufacturing ammonia, the condition laid down in column (4) of the notification got fully satisfied. On his short ground, the reasoning of the CEGAT for not extending the benefit of concessional rate of duty on raw naphtha to the appellant cannot be sustained. However, as discussed hereinafter, raw naphtha can also be said to have been utilised in manufacturing molten urea which is a chemical fertiliser covered by the term 'fertiliser' as employed by this very condition in column (4). Thus this condition can be said to have been fully complied with the appellant.” (emphasis supplied). The principles laid down by Hon'ble the Supreme Court does not leave any manner of doubt that the stage of imposition of duty would be set CEA Nos.58 and 59 of 2004 9 the moment Naphtha is converted into ammonia or fertilizer. It has also been clarified that no further process undertaken to treat ammonia would need to be gone into by the Court as there is no such requirement of the notification. The same principle is discernible from another judgement of Hon'ble the Supreme Court rendered in the case of Commissioner of Central Excise Mumbai v. M/s National Organic chemical Industries Ltd. AIR 2008 SCW 7872. A perusal of para 30 of the judgement makes it evident that if any other industrial product emerges by manufacturing process then it cannot be considered as sufficient to deny the benefit of exemption given to Naphtha. The following lines from para 30 of the judgement makes the aforesaid principle absolutely clear: “....... The inevitable and automatic emergence of ethane and methane, therefore, by itself is no ground for denying the exemption contained in the notification. The Tribunal came to the categoric finding that the respondent could not have manufactured ethylene and propylene without manufacturing its by-products ethane and methane. The Tribunal held that in any technology the emergence of ethane and methane was inevitable and hence while it is no doubt correct to say that the ethylene and propylene have been used in or in relation to the manufacture of ethane and methane,the identical quantity of the same goods has simultaneously been used in the manufacture of ethylene and propylene. The emergence of ethane and methane, therefore, cannot be a ground to deny the benefit of exemption to the respondent”. In the light of the aforesaid judgements of Hon'ble the Supreme Court CEA Nos.58 and 59 of 2004 10 it becomes evident that on principle as well as on precedents questions raised before us deserved to be answered in favour of the assessee and against the revenue. Accordingly we hold that the view taken by the Tribunal is not correct in law in holding that the benefit of exemption notification dated 23.7.1996 was not available to the assessee. Once the first question is answered in favour of the assessee it follows that no penalty would be leviable on it. Consequently, the second question is also decided against the revenue. For the reasons stated above, both these appeals succeed and the order of the Tribunal is set aside. The benefit of the notification No. 8/96 dated 23.7.1996 would enure to the appellant. The needful be done within a period of two months from the date of receipt of a certified copy of this order. (M.M.Kumar) Judge (H.S. Bhalla ) 15 .1.2009 Judge okg