Inox Air Products Pvt. Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai)
Summary: The common order of the CESTAT, Chennai concerned two appeals arising from Order-in-Appeal No. 436/2017 (CTA-I) dated 06.12.2017 and Order-in-Appeal Nos. 314 & 315/2018 dated 22.06.2018 passed by the Commissioner of GST & Central Excise (Appeals-I), Chennai. The appellant manufactured various gases, including Oxygen, Nitrogen and Medical Oxygen, classifiable under Chapter 28 of the Central Excise Tariff Act, 1985. It cleared Nitrous Oxide under sub-heading 28112930 to both manufacturers and traders while availing the concessional rate under Sl. No. 17 of Notification No. 2/2011-CE dated 01.03.2011, which covered “Anaesthetics” falling under Chapters 28, 29 or 30. TaxGuru has separately reported the broader changes made to Notification No. 2/2011-CE in subsequent years. Notification No. 2/2011-CE
The Department alleged that Nitrous Oxide had multiple uses and that the appellant had not established that quantities cleared to traders were used only as anaesthetics. Differential duty demands of Rs.31,22,225/-, Rs.10,47,816/- and Rs.2,09,084/- were raised for April 2011-December 2015, January 2016-March 2017 and April 2017-June 2017 respectively, together with interest and penalties. The adjudicating authority confirmed the demands, with penalties under Section 11AC of the Central Excise Act, 1944 and Rule 25 of the Central Excise Rules, 2002, and the Commissioner (Appeals) upheld the orders.
Before the Tribunal, the appellant contended that Sl. No. 17 of Notification No. 2/2011-CE granted a product-based concession and contained no end-use condition or buyer restriction. It submitted that the goods were Nitrous Oxide I.P./Medical Nitrous Oxide, manufactured under a valid drug licence and described consistently as “Nitrous Oxide I.P.” in invoices. The appellant relied, among other authorities, on State of Andhra Pradesh Vs Linde India Ltd. concerning the character of Nitrous Oxide I.P. as a medicine and anaesthetic. It also relied on the principle that an exemption notification cannot be supplemented by an additional end-use condition not found in its text.
The appellant further submitted that eligibility should depend upon the nature and description of the goods at clearance rather than the identity of the purchaser or subsequent use. Without prejudice, it stated that it had nevertheless maintained separate accounting for medical and industrial supplies, manufactured the medical-grade product under regulatory control and supplied it to hospitals and licensed drug traders. It contended that there was no evidence of diversion for non-medical use. The appellant also disputed the invocation of the extended period and penalties and contended that interest under Section 11AA was consequential upon the duty demand. TaxGuru has published material specifically addressing Section 11AA of the Central Excise Act, 1944.
The Revenue, on the other hand, submitted that Nitrous Oxide has multiple uses and that Sl. No. 17 covered only “Anaesthetics”. According to Revenue, the concession was available where Nitrous Oxide was cleared for use as an anaesthetic, which was accepted in respect of hospital supplies but not trader supplies. Revenue also submitted that Nitrous Oxide did not have separate colour codes for medical and industrial grades and that the drug licences of traders did not establish the actual or intended end use. It contended that the burden of establishing compliance rested on the appellant and supported invocation of the extended limitation period, interest and penalty.
The Tribunal framed three principal issues: whether Nitrous Oxide cleared to traders was eligible for the concessional rate under Sl. No. 17 of Notification No. 2/2011-CE; whether part of the demand was time-barred; and whether interest and penalty were sustainable.
On eligibility, the Tribunal reproduced the relevant entry, under which goods falling under Chapters 28, 29 or 30 and described as “Anaesthetics” were covered. It noted that the appellant manufactured and cleared Nitrous Oxide I.P. under a valid drug licence and consistently described the product as such. The Tribunal found that the product’s character as an anaesthetic was not in dispute. It reasoned that an anaesthetic is identified by its pharmacological character and therapeutic function, rather than by the identity of the purchaser or ultimate user.
The Tribunal held that the impugned order proceeded incorrectly on the premise that because Nitrous Oxide had multiple uses, the exemption was restricted to goods used exclusively for anaesthetic purposes. Relying on Hansraj Gordhandas Vs H.H. Dave, the Tribunal held that an exemption notification must be construed according to its plain language and that where the notification is unconditional and product-specific, an end-use condition cannot be imposed by implication.
The Tribunal also rejected the inference that sale to a particular trader established non-medical use. It referred to State of Kerala Vs M.K. Mathew and held that suspicion or doubt cannot substitute legal proof. The Tribunal noted that the appellant had produced an uncontroverted declaration dated 03.03.2016 from M/s Arjun Nitrous Private Ltd. confirming that it held a valid drug licence and that the IP-grade goods purchased from the appellant were sold only for medical purposes, with relevant records maintained. Revenue had not rebutted this evidence.
In considering whether an additional end-use requirement could be imposed, the Tribunal relied upon Union of India & Others Vs Inter Continental (India) [2008 (4) TMI 23 – Supreme Court / 2008 (226) E.L.T. 16 (SC)]. The Tribunal noted the Supreme Court’s ruling that an end-use certificate or verification cannot be insisted upon unless the exemption notification itself prescribes such a condition and that an executive circular cannot add to or restrict the scope of a statutory exemption notification. The Tribunal also referred to Tata Teleservices Ltd. Vs Commissioner of Customs [(2006) 1 SCC 746] on the same principle. TaxGuru has reproduced the principle from Tata Teleservices in its coverage of the legal effect of circulars vis-à-vis exemption notifications.
The Tribunal considered the Coordinate Bench decision in Solgen Energy Pvt. Ltd., which had relied upon Commissioner of Customs (Import), Mumbai Vs Dilip Kumar & Co. [2018 (7) TMI 1826 (SC) (LB)] and held that exemption notifications must be strictly construed, with ambiguity resolved in favour of Revenue. However, the Tribunal distinguished that decision because it found no ambiguity in the language of the notification involved in the present case.
According to the Tribunal, Sl. No. 17 merely described the exempted goods as “Anaesthetics” falling under Chapters 28, 29 or 30. It neither prescribed an end-use condition nor required certification or verification of end use. Such a condition could not be introduced by implication. Eligibility was therefore required to be determined on the description of the goods at the time of clearance rather than their subsequent use.
The Tribunal further held that the appellant was not required to establish the end use of the goods for claiming the exemption. It also found that Revenue had failed to establish the foundational fact of diversion of the Nitrous Oxide I.P. supplied to traders for any allegedly non-exempt purpose. The impugned orders were consequently held liable to be set aside.
In the result, the Tribunal set aside the impugned orders and allowed both appeals. The appellant was held eligible for consequential relief as per law. The order was pronounced in open court on 11.08.2026.
Cases Discussed
- Hansraj Gordhandas Vs H.H. Dave, [(1969) 2 SCR 253] — relied upon for the principle that an exemption notification is to be construed according to its plain language and that an additional condition cannot be imposed by implication where the notification is unconditional and product-specific.
- State of Kerala Vs M.K. Mathew, [(1978) 42 STC 348] — referred to for the principle that suspicion, coincidence or doubt cannot take the place of legal proof.
- Union of India & Others Vs Inter Continental (India), [2008 (4) TMI 23 – Supreme Court / 2008 (226) E.L.T. 16 (SC)] — relied upon for the proposition that an end-use requirement cannot be imposed through a circular when it is absent from the exemption notification.
- Tata Teleservices Ltd. Vs Commissioner of Customs, [(2006) 1 SCC 746] — referred to for the principle that a circular cannot impose a limitation on an exemption notification which the notification itself does not provide.
- Solgen Energy Pvt. Ltd., [2024 (5) TMI 1063] — considered and distinguished because the Tribunal found no ambiguity in the present exemption notification.
- Commissioner of Customs (Import), Mumbai Vs M/s Dilip Kumar and Company & Ors., [2018 (7) TMI 1826 (SC) (LB)] — referred to for strict interpretation of exemption notifications and distinguished on the ground that the present notification was found to contain no ambiguity.
FULL TEXT OF THE CESTAT CHENNAI ORDER
Since the issue involved is common, both appeals – Order-in-Appeal No. 436/2017 (CTA-I) dated 06.12.2017 and Order-in-Appeal Nos. 314 & 315/2018 dated 22.06.2018 – passed by the Commissioner of GST & Central Excise (Appeals-I), Chennai, are disposed of by this common order.
An apércu of the facts
2. The appellant manufactures various gases, including Oxygen, Nitrogen and Medical Oxygen, classifiable under Chapter 28 of the Central Excise Tariff Act, 1985. The appellant cleared Nitrous Oxide under sub-heading 28112930 both to manufacturers and traders by availing the concessional rate of duty under Entry 17 of Notification No. 2/2011-CE dated 01.03.2011, which extends the benefit to “Anaesthetics” falling under Chapters 28, 29 or 30. The Department alleged that since Nitrous Oxide has multiple uses and that the assessee has not shown that the said product cleared to traders was used as anaesthetics only they were therefore ineligible for the concession. Accordingly, show cause notices were issued demanding differential duty of Rs.31,22,225/-, Rs.10,47,816/- and Rs.2,09,084/-for the periods April 2011-December 2015, January 2016-March 2017, and April 2017-June 2017 respectively, along with interest and penalties. The adjudicating authority confirmed the demands with interest and imposed penalties under Section 11AC of the Central Excise Act, 1944 and Rule 25 of the Central Excise Rules, 2002. The Commissioner (Appeals) upheld the orders, leading to the present appeals.
3. The learned Advocate Shri S. Kothari appeared for the appellant and Ld. Authorized Representative Smt. Anandalakshmi Ganeshram appeared for the respondent.
Submissions made by the Appellant
3.1 Shri S. Kothari Ld. Advocate submitted as below, on behalf of the Appellant.
A. Sl. No. 17 of Notification No. 2/2011-CE grants a product-based concession. No end-use condition can be imported into the Notification. The Appellant submits that the goods cleared to traders were admittedly Nitrous Oxide I.P./Medical Nitrous Oxide, a regulated pharmacopoeia-grade anaesthetic manufactured under a valid drug licence in accordance with the Drugs and Cosmetics Act, 1940, the Indian Pharmacopoeia and the National List of Essential Medicines, 2011, and not industrial nitrous oxide. The product was manufactured, tested, labelled and cleared under statutory regulatory control, and the invoices consistently described it as “Nitrous Oxide I.P.”, irrespective of whether supplies were made directly to hospitals or through licensed drug traders. The Supreme Court in State of Andhra Pradesh Vs Linde India Ltd., 2020 (36) G.S.T.L. 3 (S.C.), recognised Nitrous Oxide I.P. as a medicine and anaesthetic. The Department itself does not dispute this character; its sole objection is that supplies to traders were not proved to have been ultimately used as anaesthetics. Thus, the dispute rests entirely on importing an end-use condition into Sl. No. 17 of Notification No. 2/2011-CE, which grants the concession to “Anaesthetics” falling under Chapters 28, 29 or 30 without prescribing any end-use requirement. It is settled law that exemption notifications must be construed strictly and no additional conditions can be read into them [Union of India Vs Inter Continental (India) – 2008 (226) E.L.T. 16 (S.C.)]. Likewise, in Goyal M.G. Gases Pvt. Ltd. Vs CCE, Ghaziabad [2014 (309) E.L.T. 327 (Tri.-Del.)], the Tribunal held that the character of medical-grade gases is determined by Indian Pharmacopoeia standards and cannot be altered by the identity of the purchaser or downstream use. Accordingly, the goods cleared by the Appellant were indisputably “Anaesthetics” within Sl. No. 17, and the concessional rate cannot be denied by importing an end-use condition absent from the notification.
B. Exemption cannot be denied based on the identity of the buyer Central Excise is a duty on manufacture, and eligibility to an exemption is determined by the nature and description of the goods at the time of clearance, not by their subsequent distribution or consumption. There is no requirement in the Central Excise law that exempt goods must be supplied directly to the ultimate user. Accordingly, once it is undisputed that the goods cleared were Nitrous Oxide I.P., i.e., “Anaesthetics” covered by Sl. No. 17 of Notification No. 2/2011-CE, the concession cannot be denied merely because the purchaser is a trader. The Department’s assumption that traders may divert the goods for other uses is purely speculative and legally irrelevant in the absence of any statutory end-use condition.
C. Without prejudice, even if end-use were relevant, the Appellant established medical/anaesthetic use to the extent legally and commercially possible Without prejudice to its submission that Sl. No. 17 of Notification No. 2/2011-CE contains no end-use condition, the Appellant submits that it nevertheless established, to the extent legally and commercially possible, that the Nitrous Oxide I.P. supplied to traders was intended for medical/anaesthetic use. The product was consistently described in purchase orders and invoices as “Nitrous Oxide I.P.” or “Medical Nitrous Oxide”, manufactured and cleared under the Drugs and Cosmetics Act, 1940 under FDA oversight, and supplied only to hospitals and licensed drug traders, while industrial nitrous oxide was separately invoiced and cleared on payment of full duty. The Department’s expectation that the Appellant should track downstream use has no statutory basis and is commercially impracticable. Even so, the Appellant produced declarations evidencing onward supplies to hospitals. Their rejection, merely because the traders also dealt in other products, is unsustainable, particularly when the Department has not established a single instance of diversion for non-medical use. Having maintained regulatory compliance, separate accounting of medical and industrial supplies, and licensed distribution, the Appellant discharged any conceivable burden of proof; the impugned order imposes an impossible standard, contrary to the maxim lex non cogit ad impossibilia.
D. Extended period and penalty are not invocable
(a) Appeal No. E/40577/2019
The demand arises from a pure question of interpretation, namely whether Sl. No. 17 of Notification No. 2/2011-CE can be construed as incorporating an end-use condition. There is neither allegation nor evidence of fraud, suppression, wilful misstatement or intent to evade duty. On the contrary, the Appellant exercised due diligence by manufacturing and clearing Nitrous Oxide I.P. under a valid drug licence, consistently describing it as “Nitrous Oxide I.P.” in its invoices, and supplying it only to hospitals or licensed drug traders. Since downstream use is beyond the manufacturer’s control and is not contemplated under the Central Excise law, the extended period under Section 11A(4) is inapplicable. For the same reasons, the mandatory ingredients for penalty under Section 11AC—fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade duty—are wholly absent. The dispute is purely interpretational with full disclosure of all material facts; accordingly, neither the extended period nor penalty under Section 11AC can be sustained.
(b) Appeal No. E/42247/2018
The penalty under Rule 25 of the Central Excise Rules, 2002 has been imposed solely on the allegation that the Appellant failed to pay the appropriate duty. As submitted above, the duty demand itself is unsustainable and the Appellant has correctly availed the concessional rate under Notification No. 2/2011-CE. Consequently, the very basis for invoking Rule 25 fails, and the penalty is liable to be set aside.
E. Interest
Interest under Section 11AA, being consequential to the duty demand, cannot survive once the demand fails.
F. The Ld. Counsel that in view of the submissions the Appeal filed by the Appellant may kindly be allowed along with consequential reliefs.
G. ADDITIONAL WRITTEN SUBMISSIONS AFTER HEARING
The appellant filed an additional written submission as permitted, in response to the Revenue relying on Commissioner of Customs Vs Solgen Energy Pvt. Ltd., 2024 (5) TMI 1063, during the public hearing. The Appellant stated that the said decision is distinguishable as it dealt with a conditional exemption under Notification No. 12/2012-CE, whereas Sl. No. 17 of Notification No. 02/2011-CE is a description-based exemption for “Anaesthetics” without any end-use condition or buyer restriction. In the present case, the Department itself accepts that the goods were Nitrous Oxide I.P., an anaesthetic, and has extended the benefit for hospital clearances; denial for trader clearances merely imports an impermissible downstream end-use requirement. Even assuming end-use relevance, the Appellant has demonstrated due diligence through regulatory compliance, medical-grade manufacture and controlled distribution, with no evidence of diversion. The ratio of VVF India Ltd. Vs Union of India (C/SCA/4418/2014, decided on 21.11.2025), relying on Inter Continental (India) Vs Union of India, 2003 (154) E.L.T. 37, supports that exemption eligibility depends on the description of goods in the notification and no additional end-use condition can be introduced. Accordingly, Nitrous Oxide I.P., being covered as “Anaesthetics” at the time of clearance, cannot be denied exemption based on the identity of the buyer or alleged downstream use. The Appellant reiterates all other grounds and prays for allowing the appeal with consequential benefits.
Submissions made by the Respondent-Revenue
3.2 Smt. Anandalakshmi Ganeshram, Ld. Authorized Representative submitted on behalf of Revenue that;
A. Nitrous Oxide (“Laughing Gas”) has multiple uses, including as an oxidizer in rocket motors, a fuel additive in racing vehicles, an aerosol propellant/food additive, and as an anaesthetic in hospitals.
B. Sl. No. 17 of Notification No. 2/2011-CE exempts only “Anaesthetics”, concessional rate was available only where Nitrous Oxide was cleared for use as an anaesthetic. Accordingly, supplies made to hospitals were considered eligible for the concession, whereas supplies made to traders were denied the benefit on the ground that the assessee had not established that such clearances were intended exclusively for anaesthetic use.
C. Unlike Oxygen, Nitrous Oxide does not have separate colour codes for medical and industrial grades, making it difficult to identify the end use of supplies made to traders. Since the exemption is use-specific, the assessee’s contention that the notification prescribes no end-use condition was rejected.
D. The production of drug licences of certain traders was held insufficient to establish eligibility, as such licences merely authorized the sale of medical products and did not prove that the Nitrous Oxide supplied was used exclusively as an anaesthetic.
E. The burden of proving compliance with the end-use condition rested on the assessee. In the absence of satisfactory evidence establishing that supplies to traders were intended solely for use as anaesthetics, the concessional rate was held to be unavailable.
F. On limitation it was submitted that the nature of the clearances could not be ascertained from the monthly returns and came to light only upon audit verification of invoices. Hence the extended period of limitation has rightly been invoked along with interest and penalty. The Ld. A.R. prayed that the appeal may be rejected.
Analysis
4. We have heard the parties to the dispute and carefully perused the appeal memorandum and connected documents and written submissions. We find that three major issues have been raised by the appellant.
A. Whether the clearance of Nitrous Oxide made to the traders by the Appellant are eligible for concessional rate of duty as per Sl. No. 17 of Notification No. 02/2011-CE.
B. Whether a portion of the demand is time-barred.
C. Whether the burden of interest and penalty lies on the appellant.
5. Eligibility for concessional rate of duty.
5.1 The dispute pertains to grant of exemption under entry Sl. No. 17 of Notification No. 02/2011-CE. It would be apposite to reproduce the relevant part of the ‘Table’ for the same below:
| S. No | Chapter or heading or subheading or tariff item of the First Schedule | Description of the excisable goods |
|---|---|---|
| 17. | 28,29 or 30 | Anaesthetics |
5.2 The Appellant has stated that they are manufacturing and clearing Nitrous Oxide I.P. under a valid drug licence, consistently describing it as “Nitrous Oxide I.P.” in its invoices, and supplying it only to hospitals or licensed drug traders.
5.3 ‘Anaesthesia’ is derived from the Greek word meaning ‘without sensation’. The term is applied to medications which can produce anaesthesia, as well as to the whole process that patients undergo when having surgical and other medical procedures. As per the online Cambridge Dictionary ‘anaesthetic’ means:
anaesthetic
a substance that makes you unable to feel pain:
The operation is performed under anaesthetic.
The procedure is carried out under local anaesthetic (= a substance that makes you unable to feel pain in part of your body).
I’ve never had a general anaesthetic (= a substance that makes you unconscious so you do not feel pain).
5.4 That the product manufactured is an anaesthetic is not in dispute. From a scientific standpoint, an “anaesthetic” is identified by its pharmacological character and therapeutic function— namely, its ability to produce loss of sensation or anaesthesia— not by the identity of the purchaser or the ultimate user.
Accordingly, where Nitrous Oxide I.P. conforms to pharmacopoeial standards and is manufactured as a medical anaesthetic, its character as an “anaesthetic” is determined at the stage of manufacture and clearance, unless the relevant exemption notification expressly introduces an end-use condition.
6. The impugned order erroneously proceeds on the premise that, since the goods have multiple uses, Sl. No. 17 of Notification No. 2/2011-CE is confined to goods used exclusively for anaesthetic purposes. We are unable to agree. As held by the Constitution Bench of the Supreme Court in Hansraj Gordhandas Vs H.H. Dave [(1969) 2 SCR 253], an exemption notification must be construed strictly according to its plain language, there is no room for any intendment, and that the matter should be governed wholly by the language of the notification, i.e., by the plain terms of the exemption. Hence if the notification is unconditional and product specific no end use condition can be imposed by implication.
7. The impugned order infers, from the sale of the goods to M/s Arjun Nitrous Private Ltd., that they were used for non-medical purposes. Such an inference is unsupported by evidence. As held by the Supreme Court in State of Kerala Vs M.K. Mathew [(1978) 42 STC 348], “it is now well settled that strong suspicion, strange coincidences and grave doubts cannot take the place of legal proof.” Moreover, the Appellant has produced an uncontroverted declaration dated 03.03.2016 from M/s Arjun Nitrous Private Ltd. confirming that it held a valid drug licence and that the IP-grade goods purchased from the Appellant were sold only for medical purposes, with relevant records maintained. Revenue has not rebutted this evidence.
8. In Union of India & Others Vs Inter Continental (India) [2008 (4) TMI 23 – Supreme Court / 2008 (226) E.L.T. 16 ( SC)], the Hon’ble Supreme Court held that an end-use certificate or end-use verification cannot be insisted upon unless the exemption notification itself prescribes such a condition. In the case, the Revenue sought to deny the benefit of concessional customs duty under Notification No. 17/2001-Cus. by relying on a subsequent CBEC Circular requiring production of an end-use certificate. Upholding the High Court’s judgment, the Court ruled that an executive circular cannot add to, restrict, or whittle down the scope of a statutory exemption notification by imposing conditions not contained therein. Relying on Tata Teleservices Ltd. Vs Commissioner of Customs [(2006) 1 SCC 746], the Court dismissed the Revenue’s appeal and reaffirmed that exemption notifications must be applied as issued, without importing additional conditions through administrative instructions.
9. We have considered the decision of the Coordinate Bench in Solgen Energy Pvt. Ltd. (supra). The Tribunal, relying on Commissioner of Customs (Import), Mumbai Vs Dilip Kumar & Co. [2018 (7) TMI 1826 (SC) (LB)], held that exemption notifications must be construed strictly and any ambiguity resolved in favour of the Revenue. However, as we find no ambiguity in the language of the present notification, the said decision is distinguishable.
10. No. 17 of Notification No. 2/2011-CE merely describes the exempted goods as “Anaesthetics” falling under Chapters 28, 29 or 30. It neither prescribes an end-use condition nor requires any certification or verification thereof. Such a condition cannot be read into the notification by implication. Eligibility must, therefore, be determined on the basis of the description of the goods at the time of clearance and not their subsequent use.
11. Accordingly, the Appellant was not required to establish the end use of the goods to claim the exemption. In any event, Revenue has even failed to establish the foundation fact of their allegation that the Nitrous Oxide I.P. sold to traders was diverted for any purpose which according to them was non-exempt, before the onus of proof is shifted to the Appellant. The impugned orders are hence liable to be set aside.
Conclusion
12. Accordingly, we set aside the impugned orders and allow the appeals. The Appellant is eligible for consequential relief as per law. The appeals are disposed of accordingly.
(Order pronounced in open court on 11.08.2026)
