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CASE NO.:

Appeal (civil) 2448 of 1992

PETITIONER:

GUJARAT NARMADA VALLEY FERTILIZERS CO.

RESPONDENT:

COLLECTOR OF CENTRAL EXCISE, VADODARA

DATE OF JUDGMENT: 18/01/2001

BENCH:

B.N. KIRPAL & RUMA PAL & BRIJESH KUMAR

JUDGMENT:

JUDGMENT

2001 (1) SCR 447

The Judgment of the Court was delivered by KIRPAL, J.

Civil Appeal Nos. 2448/92 arid 9122/1994.

Interpretation of the exemption notifications relating to heavy petroleum

stock is for consideration in these appeals.

The appellants manufacture fertilizers, In the manufacture thereof apart

from other items they also use Low Sulphur Heavy Stock (hereinafter

referred to as "LSHS") which is regarded as heavy petroleum stock in

respect of which exemption notifications have been issued.

The Gujarat Narmada Valley Fertilizers Co. Ltd. had applied in 1983 for a

licence in Form-L6 so as to obtain without payment of duty excisable goods,

namely, LSHS which was to be used for the industrial process of manufacture

of fertilizers. In the said application, it was stated that 30,000 metric

tonnes of LSHS was to be used as feed stock per month. The application also

gave the manner of manufacture and it was inter alia staled that Ammonia

was manufactured using furnace oil arid LSHS as feed stock alongwith oxygen

and steam by employing partial oxidation process. Explaining the process

further, it was stated that as a result of employing the said partial

oxidation process, gases are produced which are contaminated with soot.

Thereafter, there are stages at which the gases initially produced are

purified and ultimately when the impurities have been removed the gas is

compressed and becomes liquid ammonia. This liquid ammonia is then used for

the manufacture of urea fertilizers.

According to the appellants, LSHS was used in twin fold manner - (a)

directly in manufacture of fertilizers and (b) for manufacture of steam

which in turn was used in manufacture of fertilizers.

There are three notifications of exemption with which we are concerned in

the present eases. They are notification Nos. 147/1974, 75/1984 and 127/

1988. It is not in dispute that the first two notifications, for the

purpose of these cases, are similar and therefore we need refer to only one

of them namely, notification No. 147/1974 which reads as follows:

"Exemption to Furnace Oil and heavy petroleum stock if used as feed stock

in the manufacture of fertilizers:-

In exercise of the powers conferred by sub-Rule (1) of rule 8 of the

Central Excise Rules, 1944, the Central Government hereby exempts furnace

oil and heavy petroleum stock failing respectively under Item Nos. 10 and

11A of the First Schedule to the Central Excise and Salt Act, 1944 (1 of

1944} intended for use as feed stock in the manufacture of fertilizers,

from the whole of the duty of excise leviable thereon:

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Provided that-

(i) it is proved to the satisfaction of the Assistant Collector of Central

Excise that such furnace oil or heavy petroleum stock is so used, and

(ii) the procedure set out in chapter x of the Central Excise Rules, 1944,

is followed."

As far as notification No. 127/1988 is concerned the relevant part, namely

item Nos. 56 and 57 in the table of the said notification is as follows:-

Intended for use as feed stock in the manufacture of fertilizers.

Intended for use otherwise than as feed stock in the manufacture of

fertilizers.

56. Residues of petroleum oils or of NIL oils obtained from bituminous

minerals, including heavy petroleum stock, low sulphur heavy stock and

other residual fuel oils falling under heading No. 27.13 of the said

Schedule.

57, Residues of petroleum oils or of Rs. 70 oils obtained from

bituminous per minerals, including heavy tonne petroleum stock,

low sulphur heavy stock and other residual fuel oils falling under heading

No. 27.13 of the said Schedule.

The case of the appellants is that LSHS has been used for the manufacture

of fertilizers. It is contended that with the help of LSHS steam was

produced which is an integral part in the process of manufacture of gases

which ultimately result in the formation of liquid ammonia. It is from

liquid ammonia that urea is ultimately being manufactured. Just as LSHS and

furnace oil, when first reacted with oxygen steam results in the form of

ammonia, similarly, steam also goes into the process of manufacture of

liquid ammonia and in production of steam LSHS is used and therefore the

entire quantity of LSHS was entitled to full exemption.

The revenue did not accept this contention. After show cause notice had

been issued and reply received, the appellants were asked to pay duty on

the basis that they were not entitled to the benefit of the first two

notifications inasmuch as that part of LSHS which had been used for

producing steam would not be regarded as having been used as feed stock.

Appeal to the CEGAT being unsuccessful, the present appeals have arisen.

Learned counsel for the appellants in support of their submission that they

were entitled to the benefit of the said notifications Nos. 147/1974 and

75/1984 have strongly relied upon the decision of the Patna High Court in

the Case of Fertilizer Corporation of India Ltd. V. Collector of Central

Excise, Patna, reported in [2000] 122 ELT 343. In that decision, the Patna

High Court had come to the conclusion that even that portion of LSHS which

had been used for generating steam which in turn had resulted in the

manufacture of liquid ammonia would be entitled to the benefit of the

exemption notification.

Reading the three notifications, it is clear that LSHS is entitled to

exemption either wholly or in part if it is used in the manufacture of

fertilizers. The said entries 56 and 75 are similar to entries 25 and 26 of

the exemption notification No. 75/1984 which after amendment inter alia

related to furnace oil. In item 25 of this notification there was complete

exemption from duty in relation to furnace oil if it was- "intended for use

as feed stock in the manufacture of fertilizers," Under Entry 26 duty of

furnace oil was payable at Rs. 64.10 per Kl. in respect of that furnace oil

which was -"intended for use otherwise than as feed stock in the

manufacture of fertilisers". At item Nos. 56 and 57 of the notification No,

127/1988 which had been quoted herein above, the language is similar in

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respect of LSHS to that of furnace oil. Under Entry 56 there is a complete

exemption is respect of LSHS which is intended for use as feed stock in the

manufacture of fertilizers but if LSHS was intended for use otherwise than

as feed stock but in the manufacture of fertilizers duty at the rate of Rs.

70 per tonne had to be paid.

The aforesaid notifications clearly show that In the manufacture of

fertilizers there may be more than one way in which LSHS may be used. It is

only if LSHS is used as 'feed stock' that there is a complete exemption

from duty.

The question, therefore arises as to what is 'feed stock'. Reference to the

Condensed Chemical Dictionary (Tenth Edition) by Gessner G. Hawley defines

feed stock as "Gaseous or liquid petroleum-derived hydro carbons or

mixtures of hydro carbons from which gasoline, oil fuel, petro-chemicals

are produced by thermal or catalytic cracking........" In McGraw Hill's

Dictionary on Scientific and Technical Terms, feed stock has been defined

as raw material furnished to a machine for process. According to the

Glossary of Petroleum term as per the Indian Standards Institute feed stock

means "primary material introduced into a plant for processing".

The aforesaid application for licence of M/s. Gujarat Narmada Valley

Fertilizers Co. Ltd. clearly indicated that LSHS was to be used as feed

stock and that was to be used alongwith oxygen and steam for employing

partial oxidation process. In the said application, it was not indicated

that LSHS was to be used in the production of steam which in turn was to

be employed in the manufacture of liquid ammonia. LSHS. according to the

said application, was to be used as feed stock in the manufacture of

fertilizers As is evident from hereinabove. LSHS has been used in two ways.

Firstly, it had been used as feed stock in the oxidation process when

alongwith furnace oil it came in contact with oxygen and steam which

resulted in gas with soot which was ultimately subjected to further process

before leading to liquid ammonia. Secondly, it was used for adding to the

coal which was burnt for boiling water which resulted in the production of

steam which was also an essential part of the process of manufacture of

fertilizers but that by itself would not entitle them to the benefit of

complete exemption from excise duty unless it can be shown that LSHS has

been used as feed stock in the manufacture. The notifications clearly

indicate that it is only in respect of the limited use of LSHS as feed

stock that complete exemption has been granted. LSHS used in the

manufacture of fertilizers, but not as feed stock, was however subject to

excise duty though at a tower rate.

The very process of manufacture indicated hereinabove shows that LSHS, as a

result of chemical reaction, becomes gas which is subsequently purified

resulting in liquid ammonia which can be regarded as feed stock in contra-

distinction to LSHS which is burnt and as a result whereof steam is

generated which in turn is used in the process. In the above-mentioned

second ease, LSHS is used in the manufacture of ammonia but not as a feed

stock. As such, benefit of notification No. 127/1988 would be available to

the appellants in respect of LSHS which has been used for generating steam

and this will be with effect from 1st March, 1988. In respect of the

earlier period, it is only that part of LSHS which will be entitled to 100

per cent exemption from excise duty by virtue of notification No. 147/1974

and notification No. 75/1984 which has been used as feed stock arid not for

the purpose of generating steam.

For the aforesaid reasons, while LA. No. 3/1995 in C. A. No. 9122/1994 is

allowed and it is held that the appellants therein are entitled to the

benefit of notification No. 127/1988 with effect from 1st March, 1988, the

appeals are dismissed with no order as to costs.

C.A. Nos. 3119, 3166 and 3167/2000.

In these appeals, the facts are similar to M/s. Gujarat Narmada Valley

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Fertilizers Corporation Ltd. The only difference is in the manufacture of

fertilizers in respect of liquid ammonia it is Methonol which is produced.

For the reasons stated in our decision in C. A. No. 2448/1992 these appeals

are also dismissed in so far as LSHS is used for the production of steam.