Indian Petrochemicals Corporation Limited Vs. Collector of Central Excise, Vadodara
 INSC 253 (5
A.M. AHMADI, SUJATA V. MANOHAR
V. Manohar, J.
appellant is a Government of India Undertaking. The appellant is engaged,,
inter alia, in the manufacture of Ethylene, Propylene, Benzene, Toluene and
other products falling under Chapters 27 and 29 of the Central Excise Tariff
material time the appellant obtained raw naphtha from the Refinery in terms of
Notification No.27/89-C.E. dated 1.3.1989. Under this notification, raw naphtha
falling under sub-heading No.2710.14 of the Schedule to the Central Excise
Tariff Act, 1985 intended for use in the manufacture of products specified in
the table annexed to the said notification, is exempt from payment of so much
of the duty of excise leviable thereon as is in excess of the amount calculated
at the rate of Rs.60 per Kilolitre at 15 degree Centigrade on the quantity of
naphtha consumed in the manufacture of the said products. The table of products
which is annexed to the notification, inter alia, covers Ethylene, Propylene,
Butadiene, Benzene, Toluene and Para- xylene which are the products
manufactured by the appellant from raw naphtha obtained by the appellant under
the concessional rate of excise duty under the above notification. According to
the appellant it has not violated any term of this notification.
text of the notification is as follows:
rate on naphtha used in the manufacture of specified chemicals. In exercise of
the powers conferred by sub-section (1) of section 5A of the Central Excises
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 raw naphtha,
falling under sub-heading No.2710.14 of the Schedule to the Central Excise
Tariff Act, 1985 (5 of 1986), intended for use in the manufacture of the
products specified in the Table hereto annexed from so much of the duty of
excise from so much of the duty of excise leviable thereon as is in excess of
the amount calculated at the rate of Rs.60 per kilolitre at 15 c on the
quantity of naphtha consumed in the manufacture of the said products:
that where the use is elsewhere than in the factory of manufacture the
procedure set out in Chapter x of the Central Excise Rules, 1944 is followed.
amount of naphtha consumed in the manufacture of the products shall be
calculated by subtracting from the quantity of naphtha received by the factory
manufacturing the products the quantity of naphtha returned by the factory to a
refinery, declared as such under sub-rule (2) of rule 140 of the Central Excise
cases where certain goods which are incidental, inevitable, or involuntary to
the process of manufacture the products specified in the said Table are
produced in the course of the manufacture, the exemption under this
notification shall not be denied for the reason that the said goods are not
products specified in the said Schedule.
Butadiene 4. ..........
Para-xylene ----------------------------------- According to the appellant the
entire quantity of raw naphtha obtained by it is subjected to thermal cracking
and is further subjected to fraction and other processes to extract or
manufacture these products. At an intermediate stage of manufacture, one of the
byproducts obtained is pyrolysis Gasolene. Pyrolysis Gasolene is further
processed by the appellant to obtain Benzene and Toluene which are products
enumerated in the Table. The residue left after this manufacture is further
processed to produce petroleum Resins. Petroleum Resins are not listed in
Table. What is left over is returned to the refinery.
Collector, Central Excise held that the entire quantity of pyrolysis Gasolene
which was presumed by him to be raw naphtha, was not entitled to concessional
rate of duty as it was used for the manufacture of Petroleum Resins.
levied a duty of Rs.24,41,99,988.77, ordered confiscation of land, building,
plant, machinery with option to the appellant to redeem them on payment of Rs.1
lac and imposed a penalty of Rs.5 crores.
appeal the Tribunal held that Pyrolysis Gasolene used for manufacture of
Benzene and Toluene was entitled to concessional rate of duty. But the residual
Pyrolysis Gasolene used for the manufacture of Petroleum Resins was not so
entitled. It reduced the duty to Rs.4.36 crores and reduced the penalty to
Rs.10 lacs. The present appeal is from this order.
speaking, the process of manufacture adopted by the appellant is as follows:
Naphtha which is obtained by the appellant at a concessional rate of duty under
the above notification is cracked at high temperature as a result of which (1) olefenic
rich gas (2) pyrolysis fuel oil and (3) pyrolysis gasolene are produced. Out of
these olefenic rich gas is further processed for the purpose of obtaining
ethylene, butediene, propylene and other items enumerated in the Table.
Residual gas is flared while the residue is returned to naphtha cracker. The
products which are obtained by the further processing of olefenic rich gas are
all covered by the table in the concession notification. Pyrolysis fuel oil
which is the second resultant of the thermal cracking process is used
internally as fuel and is also removed as carbon black feed stock.
this stage the respondent has accepted that the appellant has complied with the
requirements of the above notification. The difficulty in the present case has
arisen on account of the third resultant of the thermal cracking processing,
namely, pyrolysis gasolene. Pyrolysis gasolene which arises in the process of
thermal cracking is further processed by the appellant in order to obtain
benzene and toluene which are also enumerated items. Since 1984 the appellant
has put up a petroleum resin plant. After the extraction of benzene and
toluene, the residual pyrolysis gasolene is further processed in the petroleum
resin plant of the appellant. The residual product is given a C8.C9 Cut which
ultimately results in the manufacture of petroleum resins. Petroleum resins are
not mentioned in the table annexed to the above exemption notification.
to the respondent, the appellant has diverted pyrolysis gasolene for the
manufacture of petroleum resins and therefore, pyrolysis gasolene to the extent
that it is used for the manufacture of petroleum resins cannot be granted concessional
rates of excise duty Accordingly under the impugned order of CEGAT, duty of
excise must be calculated on the balance of residue of pyrolysis gasolene
"diverted" for C8.C9 Cut and not on the entire pyrolysis gasolene as
earlier held by the department. As a result the appellant has become liable to
pay duty calculated approximately at Rs.4.36 crores instead of Rs.24,41,99,988.77
as earlier held by the department.
order to decide whether the findings of Tribunal are correct, we must examine
the terms of the notification in question. The notification exempts raw naphtha
intended for use in the manufacture of products specified in the table attached
to it from so much of the duty of excise as is in excess of the amount
calculated at the rate of Rs.60 per kilolitre at 15 degree c. on the quantity
of naphtha consumed in the manufacture of the said products. It is an accepted
position that the appellant under the notification for the manufacture of
products which are listed in the table.
only contention of the department is that the appellant has not used the entire
quantity of raw naphtha for this purpose. This contention does not appear to be
correct. The entire quantity of raw naphtha which was obtained by the appellant
under the exemption notification is subjected to thermal cracking for the
purpose of obtaining ethyelene, butadiene, propylene and other items which are
incorporated in the said table. After the entire quantity of raw naphtha is
subjected to thermal cracking, three items emerge; olefenic rich gas, pyrolysis
fuel oil and pyrolysis gasolene. There is no way in which the appellant could
have avoided this outcome. Out of these resultants, olefenic rich gas is
required to be further processed for the manufacture of items forming part of
the table. One of the other resultant products, namely, pyrolysis gasolene is
further processed to obtain some more products which are listed in the table,
namely, benzene and toluene. For this processing of pyrolysis gasolene also the
department has no objection because as a result of processing of pyrolysis gasolene
the products which are obtained are listed in the table.
the further processing of residual pyrolysis gasolene after extraction of
benzene and toluene in the petroleum resin plant of the appellant is objected
to by the department. This further processing of pyrolysis gasolene residue
results in production of petroleum resins which are not enumerated in the said
table. There is no dispute that on petroleum resins so manufactured the
appellant is paying duty of excise. The only dispute is as to the duty of
excise to be levied on pyrolysis gasolene residue which is processed in the
petroleum resin plant of the appellant to manufacture resins. According to the
respondent the portion of the residual pyrolysis gasolene consumed in the
manufacture of petroleum resins should have been returned to the refinery.
first place the contention of the respondent that the appellant has diverted
raw naptha to the manufacture of petroleum resins is not correct. What the
appellant obtained under the exemption notification was raw naphtha which was
subjected to thermal cracking. The entire quantity of raw naphtha so obtained
was subjected to processing for the purpose of obtaining items enumerated in
the table. The appellant did not set apart any quantity of raw naphtha for the
purpose of obtaining petroleum resins.
merely subjected the residual pyrolysis gasolene to further processing in the
petroleum resin plant for the manufacture of petroleum resins. This residual pyrolysis
gasolene cannot be equated with raw naphtha which was obtained at concessional
rate of duty. Explanation 2 of the notification provides that in cases where
certain goods which are incidental, inevitable or involuntary to the process of
manufacture of the products specified in the said table are produced in the
course of manufacture the exemption under this notification shall not be denied
on the ground that these goods are not products specified in the said Schedule.
In fact, the respondent has issued a clarification with the concurrence of the
Ministry of Law bearing G.I.(D.R. & D.) F.No. 03/15/72-Cx.3 dated 26.3.1976
setting out as follows:
is clarified that when raw naphtha is intended for use in the manufacture of
any one or more of the products specified in the Schedule appended to the
notification the production of other goods which are
incidental/inevitable/involuntary in such production would not disturb the
scheme of exemption and that the whole of the raw naphtha would be deemed to
have been used in the manufacture of the product for the manufacture of which
raw naphtha was obtained.
this connection. our attention is drawn to a decision of this Court in the case
of State of Haryana v. Dalmia Dadri Cement Ltd. (1987
(Supp) SCC 679). In that case, cement required for use in the generation or
distribution of electrical energy was exempted from sales tax. The Punjab State
Electricity Board had obtained the cement and given certificates that it was
for use in the generation or distribution of electrical energy. The Court said
that the mere fact that some of the cement supply was, in fact, used by the
Board for activities not directly connected with the generation or distribution
of electrical energy cannot make any difference to the availability of the
exemption. The intention of the board was that the cement was directly
connected with the generation or distribution of electrical energy.
present case, the entire raw naphtha which is obtained at concessional rates of
duty is made use of for the purpose of obtaining products permitted under the
said exemption notification. Only some of the processed residue is used for the
manufacture of other products. There is, therefore, no, violation in the
present case of the exemption notification.
case of m/s. Steel Authority of India Ltd. v. Collector of Central Excise (C.A.
Nos.3406-11/90 with C.A.No. 3178/90 decided by this Court on 30-7-1995, S.P. Bharucha
and K.T. Thomas, JJ.) raw naphtha was subjected to a concessional rate of duty
under an exemption notification provided that it was intended for use in the
manufacture of fertilizers. Raw naphtha which was so obtained by SAIL was
according to the revenue not used entirely for the manufacture of fertilizers.
According to SAIL, because of abnormal operating conditions there was excessive
consumption of raw naphtha on account of low load operation, interruption in
the plant operations due to low, uncertain and fluctuation availability of power.
Also consumption of naphtha was further high because gases produced out of raw
naphtha had to be vented due to acute power crisis causing
interruption/stoppages of down stream units of the plant.
Court said that although raw naphtha for reasons beyond the control of SAIL did
not, in fact, result in the manufacture of fertilizer and had to be vented at
an interim stage, nevertheless it could not be vented at an interim stage,
nevertheless it could not be said that SAIL had violated any condition of the exemption
notification because raw naphtha which was fed by SAIL into its plant was for
the purpose and with the intention of manufacturing fertilizers.
only because of supervening circumstances that the reformed gas produced during
the interim stage of manufacture had to be vented out.
present case, pyrolysis gasolene is an incidental product which has been
further processed to obtain petroleum resin. This cannot be considered as a
diversion of raw naphtha obtained at concessional rates for manufacture of
this connection, the appellant has drawn our attention to another exemption
notification being Notification No.28/89-C.E. also dated 1.3.1989 which is as follows
of goods other than blended or compounded lubricating oils and greases. -- In exersise
of the powers conferred by sub-section (1) of section 5A of the Central Excises
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 (other than
blended or compounded lubricating oils and greases) falling under Chapter 27 of
the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) produced in a
factory and-- (a) utilised in the factory in which the said excisable goods are
produced, for the manufacture of other goods or as fuel for such manufacture
(excluding fuel used for any internal combustion engine) or both: or (b)
allowed to escape in the atmosphere by flare system of otherwise;
the whole of the duty of excise leviable thereon which is specified in the said
this notification pyrolysis gasolene which falls under Chapter 27 is produced
in the appellant's factory and it is utilised for the manufacture of goods. As
such it would be exempt from the whole of the duty of excise leviable thereon
assuming that any duty of excise is leviable on it. Therefore, we fail to see
how any duty of excise can be levied on any part of pyrolysis gasolene
manufactured in the factory of the appellant.
gasolene being an intermediate product which is produced in the factory of the
appellant, and it being utilised for the manufacture of other goods, it would
be totally exempt from payment of excise duty under the second exemption
appeal is, therefore. The appellant is not liable to pay any duty of excise on pyrolysis
gasolene. The impugned order of Tribunal is, therefore, set aside. There will,
however, be no order as to costs.