REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.1130 OF 2003

Commissioner of Central Excise, Mumbai … Appellant

Versus

M/s National Organic Chemical Industries Limited  …Respondent

J U D G M E N T

Dalveer Bhandari, J.

1. This appeal is directed against the judgment and order

dated 20th May, 2002 passed by the Customs Excise & Gold

(Control)  Appellate  Tribunal,  West  Zonal  Bench  at  Mumbai

vide Order No.CII/1570/WZB/2002 in Appeal No.E-2354/96

Bombay.

2. The  short  question  for  consideration  in  this  appeal  is

whether  ethylene  and  propylene  manufactured  by  the

respondent  assessee  and  used  in  its  factory  in  the  further

manufacture  of  the  same  goods  would  be  entitled  to  the

benefit of exemption contained in notification no.217/86.

3. The respondent assessee M/s National Organic Chemical

Industries  Limited manufactured ethylene and propylene  by

cracking raw naphtha in a naphtha cracker.   Ethylene and

propylene fall  under chapter 29 of the Central  Excise  Tariff

Act, 1985 (hereinafter referred to as “the Tariff Act”).  During

the process of cracking raw naphtha, gases such as methane

and ethane  automatically  emerge  as by-products  and is  an

inevitable consequence of cracking of raw naphtha.   Methane

and the ethane fall under chapter 27 of the Tariff Act.   

4. It is the common case of the parties that a part of the

ethylene  and  propylene  manufactured  by  the  aforesaid

process  is  captively  consumed  by  using  the  same  as  a

refrigerant in the process of separation and to provide external

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treatment to keep some of the products at low-temperature to

prevent  their  polymerization.   The  remaining  quantity  of

ethylene and propylene is sold as the final product.

5. The  case  of  the  appellant  as  set  out  in  appeal  is  as

follows:

The  respondent  assessee  holds  Central  Excise

Registration for manufacture of excisable goods falling under

chapter Nos. 27, 28, 29, 32, 38, 39 and 40 of the Schedule to

the Tariff Act.   

6. The  respondent  manufactures  petro  chemicals  falling

under chapters 27 and 29 from raw naptha.  Raw Naptha is

cracked in cracker containing number of burners and heated

upto 800 degree  centigrade.   After  the  process  of  cracking,

Ethylene  and  Propylene  gases  are  produced  in  the  factory.

These gases are also captively consumed as a refrigerant for

cooling since they have the property of reducing temperatures

upto 100 degree c. and 30 degree c. respectively.

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7. The  captively  consumed  ethylene  and  propylene  are

further used in refrigeration to manufacture products falling

under  chapters  27  and  29.   The  methane  and  ethane

manufactured in this process fall under chapter 27. Ethylene

and propylene fall under chapter 29.  The manufacture of the

products falling under chapter 27 has never been informed to

the  authorities  through  the  classification  list  filed  by  the

assessee.

8. It  is  the  further  case  of  the  appellant  that  as  per

Exemption  Notification  No.217/86  CE  dated  2.4.1986,  the

inputs  ethylene  and  propylene  (falling  under  chapter  29)

captively  consumed  in  the  manufacture  of  finished  goods

falling under chapter 29 are exempted from excise duty.  As

per the said notification such exemption will not be available

to ethylene and propylene used in the manufacture of goods

falling  under  chapter  27,  namely  methane  and ethane.   In

other  words,  excise  duty  will  have  to  be  paid  by  the

respondent assessee for such of the quantity of ethylene and

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propylene  (inputs)  captively  consumed  and  used  in  the

manufacture  of  products  falling  under  chapter  27  namely

methane and ethane.   

9. In  the  circumstances,  five  show-cause  notices  were

issued to the respondent assessee demanding central excise

duty  for  the  inputs  ethylene  and  propylene  used  in  the

manufacture  of  finished  products  falling  under  chapter  27.

The extended period of limitation was also invoked.  Penalty

was also proposed.

10. Following  five  show-cause  notices  were  issued  to  the

respondent.

S. No. Date Period 1 03.02.1993 July 1992 to December, 1992 2 04.06.1993 May 1988 to June 1992 3 02.08.1993 January 1993 to May 1993 4 28.12.1993 June 1993 to November 1993 5 29.06.1994 December 1993 to February 1994

11. By order in original dated 12.7.1996, the Commissioner

Central  Excise,  Mumbai-III  confirmed  the  duty  demands,

imposed penalty and ordered interest for delayed payment of

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duty but did not order confiscation of land, building, plant,

machinery, etc. of the assessee.

12. The appeal filed by the assessee before the Tribunal was

allowed  by  setting  aside  the  order  of  the  Commissioner

through the impugned order dated 20.5.2002.

13. Aggrieved  by  the  impugned  order  rendered  by  the

Tribunal, the Revenue is in appeal before this Court.

14. According to the appellant, the assessee is not entitled to

get  the  benefit  of  the  exemption  notification  if  the  inputs

manufactured  in  the  factory  are  captively  used  for  the

manufacture of final products not specified in column 3 of the

Table annexed to the notification.  Chapter heading 27 is not

available in column 3 of the Table.  The methane and ethane,

the  finished  products  manufactured  by  using  ethylene  and

propylene as refrigerant fall under chapter 27.  Hence, as per

the notification the ethylene and propylene (inputs) used for

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the  manufacture  of  goods  falling  under  chapter  27  are  not

entitled to get exemption from duty as per the notification.

15. In  the  order  in  original  there  is  specific  finding  that

ethylene and propylene are used in the manufacture of goods

falling under chapter 27.

16. It  was contended by the respondent that ethylene and

propylene were used as refrigerant to cool hydrocarbon gases,

which result from the cracking of naphtha.  It is as a result of

this  cracking  that  ethylene,  propylene  along  with  ethane,

methane  and  other  substances  emerge.   The  emergence  of

ethane and methane is inevitable.  Since it only emerges in the

manufacture  of  other  substances,  which  are  specified  in

column  no.3  of  the  table,  their  emergence  (ethane  and

methane) should not by itself justify denial of the benefit.

17. The  respondent  has  submitted  a  chart  indicating  the

process  of  manufacturing  of  ethylene  and  propylene.   The

chart  also  reveals  how ethane  and methane  emerge  as  by-

products.  The chart is reproduced as under:

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18. The process of manufacture indicated in the chart

indicates that some gases automatically emerge in the process

of cracking of naphtha, including ethane and methane.  The

respondent  further  submitted  that  part  of  ethylene  and

propylene manufactured by it is captively consumed or used

in or in relation to the manufacture of the same goods. The

emergence of ethane and methane, therefore, by itself is not a

ground  for  denying  the  exemption  contained  in  the

notification.   

19. The  respondent  assessee  submitted  that  there  was  no

way  by  which  the  respondent  could  have  manufactured

ethylene  and  propylene  without  producing  ethane  and

methane.  It  is not as if by using a smaller quantity of raw

material  or  other  goods  involved  in  the  process,  the

respondent could have averted the emergence of ethane and

methane.  In other words, in the technology utilized for the

manufacture  of  ethylene  and  propylene,  the  emergence  of

ethane  and methane  was  inevitable.   Hence,  while  it  is  no

doubt  correct  to  say  that  the  ethylene  and  propylene  have

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been used in or in relation to the manufacture of ethane and

methane,  the  identical  quantity  of  the  same  goods  has

simultaneously been used in the manufacture of ethylene and

propylene.   The  emergence  of  ethane  and  methane  is,

therefore, by itself is not a ground to deny the benefit of the

exemption notification.

20. Mr.  K.  Radhakrishnan,  learned  senior  advocate

appearing  for  the  appellant  in  support  of  his  submission

placed  reliance  on  the  case  of  Novopan  India  Ltd.,

Hyderabad v.  Collector  of  Central  Excise  and Customs,

Hyderabad 1994 Supp (3)  SCC 606 and submitted that in

case of ambiguity the benefit of doubt must go the Revenue.

As  far  as  this  proposition  of  law  is  concerned  there  is  no

quarrel, but it has no application to the facts of this case.

21. Reliance has also been placed by Mr. Radhakrishnan on

the case of  Commissioner of Central Excise, Chandigarh-I

v. Mahaan Diaries  (2004)  11 SCC 798.   In  this  case,  the

Court held that in order to claim benefit of a notification, a

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party must strictly comply with the terms of the notification.

If  on wording of  the notification the benefit  is  not available

then by stretching the words of the notification or by adding

words to the notification benefit cannot be conferred.    

22. Reliance was also placed on the case of  Commissioner

of Central Excise, Trichy v.   Rukmani Pakkwell Traders

(2004) 11 SCC 801.  The same principle has been reiterated in

this case and the court held that exemption notifications have

to be strictly construed.     They must be interpreted on their

own wording.  To be entitled to the benefits of a notification, a

person  has  to  strictly  comply  with  the  conditions  of  that

notification.   If  on  a  plain  reading  of  the  notification  the

benefit is not available then merely on the basis of principles

applied in infringement cases benefit cannot be claimed.

23. Mr. D.B. Shroff, learned senior counsel appearing for the

respondent  submitted  that  he  is  not  questioning  the  well-

settled proposition of law, but the respondent assessee in this

case is entitled to the benefits of the notification on a plain

reading of the notification.

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24. Mr.  Shroff  further  placed  reliance  on  the  following

decisions:

In  Union  of  India  &  Others  v.  Tata  Iron  &  Steel

Company Limited, 1977 (1) ELT 61, a four-Judge bench of

this Court held as under:

“23. ..  The  High  Court  rightly  said  that  the Notification does not say that exemption is granted only when duty paid pig iron is used and that the exemption would not be available  if  duty-paid pig iron is mixed with other non-duty paid materials.  If the intention of the Government were to exclude the exemption to duty-paid pig iron when mixed with other  materials  then  the  notification  would  have used  the  expression  “only”  or  “exclusively”  or “entirely” in regard to duty-paid pig iron. The object of the notification was to grant relief by exempting the duty-paid pig iron.”

25. In  Indian Farmers Fertiliser Cooperative Limited  v.

Commissioner  of  Central  Excise,  Ahmedabad,  1996  (86)

ELT 177, this Court observed as under:

“7. ..The Exemption Notification does not require that  the  ammonia  should  be  used  directly  in  the manufacture of fertilisers. It requires only that the ammonia  should  be  used  in  the  manufacture  of fertilisers.  The  Exemption Notification must  be  so construed  as  to  give  due  weight  to  the  liberal language it uses. The ammonia used in the water

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treatment,  steam  generation  and  inert  gas generation plants, which are a necessary part of the process of manufacturing urea, must, therefore, be held to be used in the manufacture of ammonia and the raw naphtha used for the manufacture thereof is entitled to the duty exemption.”

26. Mr.  Shroff  also  placed  reliance  on  Indian

Petrochemicals  Corporation Ltd.  V.  Collector  of  Central

Excise,  Vadodara  1997  (92)  ELT  294.   In  this  case,  this

Court observed as under:

“19.  Under  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.

20.  Pyrolysis  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 notification.”

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27. In  National  Organic  Chemical  Industries  Ltd.  V.

Collector  of  Central  Excise,  Bombay  1997  (89)  ELT 643,

this Court observed as under:

“11.  Crude  petroleum  is  refined  to  produce  raw naphtha.  Raw  naphtha  is  further  refined,  or cracked, to produce the said products. This is not controverted. It seems to us to make no difference that  the  appellants  buy  the  raw  naphtha  from others. The question is to be judged regardless of this, and the question is whether the intervention of the raw naphtha would justify the finding that the said  products  are  not  "derived  from  refining  of crude petroleum". The refining of crude petroleum produces various products at different stages. Raw naphtha is one such state. The further refining, or cracking,  of  raw  naphtha  results  in  the  said products. The source of the said products is crude petroleum.  The  said  products  must,  therefore,  be held to have been derived from crude petroleum.”

28. In Doypack Systems (Pvt.) Ltd. v. Union of India 1988

(36)  ELT  201,  this  Court  had  an  occasion  to  examine  the

expressions “pertaining to”, “in relation to” and “arising out of”

and observed as under:

“46. …. The expressions "pertaining to", "in relation to"  and  “arising  out  of",  used  in  the  deeming provision, are used in the expansive sense, as per decisions of  courts,  meanings found in  standard dictionaries, and the principles of broad and liberal interpretation in consonance with Article 39(b) and (c) of the Constitution.”

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29. Mr. Shroff further placed reliance on  Commissioner of

Central  Excise,  Coimbatore  v.  Jawahar  Mills  Ltd.  2001

(132) ELT 3 wherein this Court whilst interpreting the words

“used in the factory of manufacture” used in clause (c) of the

Explanation to Rule 57 Q (1) held that the goods need not be

used for producing the final product or used in the process of

any goods  for  the  manufacture  of  final  product  or used for

bringing  about  any  change  in  any  substance  for  the

manufacture of final product and the only requirement is that

the same should be used in the factory of the manufacturer.

Thus, it can be seen that the language used in the explanation

is very liberal.

30. We  have  heard  the  learned  counsel  for  the  parties  at

length  and  perused  the  judgments  cited  at  the  Bar.   The

Tribunal’s  finding  that  the  ethylene  and propylene  used  as

refrigerant has been used in or in relation to the manufacture

of the same goods.  The inevitable and automatic emergence of

ethane  and  methane,  therefore,  by  itself  is  no  ground  for

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denying  the  exemption  contained  in  the  notification.   The

Tribunal  came  to  the  categoric  finding  that  the  respondent

could not have manufactured ethylene and propylene without

manufacturing  its  by-products  ethane  and  methane.   The

Tribunal held that in any technology the emergence of ethane

and methane was inevitable and hence while it  is no doubt

correct to say that the ethylene and propylene have been used

in or in relation to the manufacture of ethane and methane,

the identical quantity of the same goods has simultaneously

been used in the manufacture of ethylene and propylene.  The

emergence  of  ethane  and  methane,  therefore,  cannot  be  a

ground to deny the benefit of exemption to the respondent.

31. In our considered view, no interference is called for in the

well-reasoned  judgment/order  of  the  Tribunal.   The  appeal

being devoid of any merit is accordingly dismissed.  However,

in view of the facts & circumstances of the case, the parties

are directed to bear their own costs.

…….……………………..J.

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 (Dalveer Bhandari)

…….……………………..J.   (Harjit Singh Bedi)

New Delhi; November 6, 2008.

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