Rashtriya Chemicals And Fertilizers Limited Vs Commissioner of Central Excise And Service Tax (LTU) (Supreme Court of India)
Conclusion: Excise exemption notifications based on “use” or “intended use” should be interpreted liberally in favour of the assessee as once the goods were used for the intended purpose, the fact that a portion was incidentally used for other activities did not disentitle assessee from claiming the exemption.
Held: Appellant, a public sector undertaking engaged in manufacture of fertilizer and ammonia, procured Naphtha at nil rate of duty under exemption notifications on the condition of “intended use” in fertilizer manufacture. The Naphtha was used along with natural gas in a common steam generation plant, and the steam so generated was utilized across multiple units, including fertilizer, power generation, and certain non-fertilizer operations. Revenue alleged diversion of Naphtha for non-eligible uses and issued multiple show cause notices demanding duty, interest, and penalty by invoking the extended limitation period. Adjudicating authority and subsequently the CESTAT upheld the demand (partly modifying penalties), leading to the present appeals. Appellant contended that exemption depended on “intended use” and not actual end-use segregation, which was impracticable in an integrated plant. It was argued that the dominant purpose of Naphtha usage was fertilizer manufacture, and no diversion as alleged had occurred. Further, there was no suppression or intent to evade duty, particularly in light of full disclosures, issuance of CT-2 certificates by authorities, and revenue neutrality. Revenue, on the other hand, contended that exemption was not available for quantities indirectly used in non-fertilizer activities and justified proportionate demand along with invocation of extended limitation and penalty. The Court held that once eligibility under the exemption notification was established, the expression “intended use” must be construed liberally, and exemption could not be denied merely because a portion of the input was incidentally or inseparably used in ancillary processes. In an integrated system where precise segregation was not feasible, dominant purpose and declared intent are determinative. Further, in absence of deliberate suppression or intent to evade duty—and particularly in a revenue-neutral situation—the extended period of limitation and penalty under Section 11AC were not invocable. Accordingly, the impugned orders were set aside, appeals allowed, and connected proceedings rendered infructuous.
