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PETITIONER: M/S. INDIAN PETROCHEMICALSCORPORATION LIMITED

       Vs.

RESPONDENT: COLLECTOR OF CENTRAL EXCISE.VADODARA

DATE OF JUDGMENT:       05/03/1997

BENCH: CJI, A.M. AHMADI, SUJATA V. MANOHAR

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T Mrs. Sujata V. Manohar, J.      The 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 Act, 1985.      At the 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.      The text of the notification is as follows:      "Concessional 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

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    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:      Provided  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.      Explanation:-      1.   The 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 Rules, 1944.      2.   In 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.      -----------------------------------                  TABLE      -----------------------------------      1.                    Ethylene      2.                    Propylene      3.                    Butadiene      4.    ..........      5.    ..........      6.                    Benzene      7.                    Toluene      8.                    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.      The 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. He levied a duty of Rs.24,41,99,988.77, ordered confiscation

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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.      In 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.      Broadly speaking, the process of manufacture adopted by the appellant is as follows:      Raw 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.      Upto 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.      According 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.      In 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.      The only  contention of  the  department  is  that  the

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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.      However, 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.      In the  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. It has  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:      "..........it  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

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    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.      In  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.      In the  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.      In the  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. The 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. It was  only because  of supervening  circumstances that the reformed  gas   produced  during   the  interim   stage   of manufacture had to be vented out.      In  the   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 other items.      In  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

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follows :      "Exemption  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;      from  the  whole  of  the  duty  of      excise leviable  thereon  which  is      specified in the said Schedule.      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.      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.      The 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.