“Intended use” governs excise exemption: Supreme Court allows fertilizer manufacturer exemption on Naphtha despite mixed use in steam generation

Held: The Supreme Court held that exemption from central excise duty based on “intended use” must be interpreted in a purposive and liberal manner once eligibility is established, and that Naphtha procured for use in the manufacture of fertilizer or ammonia does not lose exemption merely because it is used in an integrated process involving generation of steam and electricity, where such processes are intrinsically linked to fertilizer production. The Court further held that denial of exemption based on proportionate or indirect use is unsustainable in the absence of clear diversion or misuse, and that extended limitation cannot be invoked without proof of deliberate suppression or intent to evade duty.

Summary: The appellant, a public sector fertilizer manufacturer, procured Naphtha at nil rate of duty under exemption notifications meant for use in the manufacture of fertilizer or ammonia. The revenue alleged that Naphtha was also indirectly used in generating steam and electricity consumed in non-fertilizer units, and raised substantial duty demands along with penalty by invoking the extended limitation period. The adjudicating authority and CESTAT upheld the demand by adopting a proportionate usage method, holding that exemption would not apply to Naphtha used beyond fertilizer production.

The Supreme Court examined the scheme of exemption notifications, particularly the expression “intended use”, and distinguished between eligibility for exemption and its application. It held that once the assessee satisfies the requirement of intended use, the exemption must be construed liberally and cannot be denied merely because the manufacturing process involves integrated or ancillary use such as steam and electricity generation. The Court found that Naphtha was used as fuel in a common boiler along with natural gas, and it was not feasible to segregate its ultimate end-use across different units. It further held that the absence of the term “exclusively” in the notification was significant, and that the revenue could not import such a condition artificially. The Court also noted that the appellant had followed prescribed procedures, including obtaining CT-2 certificates, and there was no material to establish deliberate suppression or misstatement. Consequently, invocation of extended limitation and imposition of penalty were held to be unjustified.

Decision: The Supreme Court allowed the appeals, set aside the orders of the CESTAT and the adjudicating authority confirming duty, interest, and penalty, held that the appellant was entitled to exemption on Naphtha based on intended use, rejected the invocation of extended limitation, and disposed of the connected appeal arising from rectification proceedings as infructuous.