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CASE NO.: Appeal (civil)  318-322 of 2006

PETITIONER: Commissioner of Central Excise, Chennai-I

RESPONDENT: Chennai Petroleum Corpn. Ltd

DATE OF JUDGMENT: 19/04/2007

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T  WITH  Civil Appeal No.4607 and 4639 of 2005

KAPADIA, J.

       The above group of Civil Appeals and cross Civil Appeals  are filed by the Department and the assessee, M/s. Chennai  Petroleum Corporation Ltd. respectively under Section 35L(b)  of the Central Excise Act, 1944.         The assessee manufactures petroleum products like  naptha from crude oil since 1969.  These petroleum products  fall under Chapters 27, 28 and 29 of the Central Excise Tariff  Act, 1985.  Basically, the assessee is a refinery.  It uses  Refinery Fuel Oil (RFO), being the residuary left after  distillation of Bombay High Crude Oil as fuel for generation of  high pressure steam which in turn is used for generation of  electricity for their co-generation plant in which the high  pressure steam moves a turbine which generates electricity.  A  part of that electricity is supplied to Tamil Nadu Electricity  Board and the major portion of it is captively consumed.         In the present case, we are concerned with three  products produced by the assessee in their refinery from the  said RFO.  The three products are naptha, sulphur and  electricity. The assessee is a refinery.  It is declared by the  Central Government to be a "deemed warehouse".  RFO is the  material which remains in the refinery.  The said RFO is not  removed from the refinery.  It is a residue which remains at  the bottom of the columns in the refineries.  It is like slurry.   According to the Department, assessee had failed to declare to  the Department that the said RFO was used to produce  electricity.  According to the Department, the assessee had  failed to declare to the Department that a part of the electricity  generated was sold to Tamil Nadu Electricity Board.   According to the Department, sulphur was not a petroleum  product and, therefore, to the extent that the said RFO was  used to produce sulphur was dutiable and not exempted.   According to the Department, none of the three products,  namely, naptha, sulphur and electricity were petroleum  products and, therefore, the refinery was liable to pay duty.   According to the Department, the refinery was a "deemed  warehouse", but the above three products were not petroleum  products and, therefore, the assessee was liable to pay duty.   Accordingly, demands were made on the assessee to pay  arrears of duty for the period December 1993 to July 1998 and  for the period August 1998 to January 1999.  It may be noted  that the period December 1993 to July 1998 (five years) came  under show-cause notice dated 22nd December, 1998 whereas

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the period August 1998 to January 1999 came under show  cause notice dated 17th February, 1999.  Consequently, in the  present case, we are required to consider whether the  Department was entitled to invoke the extended period of  limitation under Section 11A with show cause notice dated  22nd December, 1998.  However, that question did not arise in  the case of show cause notice dated 17th February, 1999 since  the demand fell within the period of limitation.         Having heard learned counsel on both sides, we are in  agreement with the view expressed by the Tribunal in its  impugned judgment by which it has been held that naptha is  a petroleum product and, therefore, the assessee which was a  "deemed warehouse" was entitled to exemption in respect of  RFO used for producing naptha during the above period.   Therefore, to this extent, the assessee succeeds.  To this  extent, the show cause notice dated 22nd December, 1998  fails.         We are also in agreement with the view taken by the  Tribunal that sulphur produced on RFO is a by-product and  consequently, the show cause notice dated 22nd December,  1998 demanding duty on RFO used by the assessee for the  manufacture of sulphur is not sustainable.  The assessee  succeeds in this regard also.         However, the assessee produces electricity from RFO.   That electricity is sold to Tamil Nadu Electricity Board.  The  major portion of the electricity produced is captively  consumed.  The entire generated electricity is not sold.  A part  of the generated electricity is sold.  It was vehemently argued  before us on behalf of the assessee that the refinery was a  "deemed warehouse" and whatever is produced in the refinery  from the RFO was entitled to exemption.  It was vehemently  urged that RFO is a residuary which remains at the bottom of  the columns.  That RFO was never removed from the refinery.   Hence, the assessee was entitled to claim deduction for even  the RFO used in generation of electricity.  We do not find merit  in this argument.  The assessee is a refinery.  It is a "deemed  warehouse".  It is so recognised by the Central Government.   This is not in dispute.  The very purpose behind giving the  status of "deemed warehouse" to the refinery is to provide  exemption to the RFO which is used for producing petroleum  products.  That status is not meant for producing products  which are not petroleum products.  In other words, the  Deemed Warehouse Status demands nexus to the final  product cleared from it.  Generation of electricity, if captively  consumed, is exempted from duty.  This is because electricity  which is generated in the refinery is used to operate the  various processes within the refinery.  In the refinery, there  exists large number of processes.  Each process generates an  item and, therefore, every refinery is given the status of  "deemed warehouse".  However, a portion of the generated  electricity, in the present case, is sold to Tamil Nadu  Electricity Board.  To that extent alone, the Department was  right in demanding duty on RFO.          The question still remains as to whether the Department  was right in invoking the extended period of limitation under  Section 11A of the Central Excise Act.  In this connection, we  are of the view that there was no suppression on the part of  the assessee.  As stated above, the assessee is a Public Sector  Company.  It is owned by the Government of India.  The  Department was aware that the assessee was a refinery.   Nothing prevented the Department from visiting the site.   Nothing prevented the Department from inquiring into the  process within the refinery in the matter of production of  naptha, sulphur and electricity.  Generation of electricity was  also used for the running of the refinery.  The electricity was

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supplied to Tamil Nadu Electricity Board (partly).  In the  circumstances, there was no suppression on the part of the  assessee and, therefore, we are of the view that the  Department was wrong in invoking the extended period of  limitation under the show-cause notice dated 22nd December,  1998 for the period December 1993 to July 1998.  The  demand to that extent is beyond limitation.  The assessee  succeeds in that regard.   The second show cause notice dated 17th February, 1999  is within limitation.  It seeks to demand duty for the period  August 1998 to January 1999 on the RFO used for producing  electricity.  We have held that the electricity generated from  RFO which was captively consumed by the refinery was not  liable to duty.  To that extent, the demand made in the show  cause notice dated 17th February, 1999 fails.  However, as  stated above, a part of the electricity produced from RFO was  sold to Tamil Nadu Electricity Board during the period August  1998 to January 1999.  To that extent alone, the assessee  would be liable to payment of duty.  This will require  recalculation.  Accordingly, to that extent alone, the matter is  being remitted to the adjudicating authority for fresh  determination of the duty amount payable by the assessee  during the period August 1998 to January 1999.   We are also of the view that the penalty imposed on the  assessee was unjustified since it has produced naptha and  sulphur which are petroleum products.  Similarly, the  assessee has produced electricity from RFO, the major portion  of which has been used for captive consumption and a minor  portion is sold to Tamil Nadu Electricity Board.  In the  circumstances, we are of the view that the Department had  erred in imposing penalty.         Before concluding, we may quote hereinbelow paragraph  12 and paragraph 13 from the judgment of this Court in the  case of Indian Oil Corporation Ltd. v. Collector of Central  Excise, Baroda - [2006 (202) ELT 37 (SC)] : "12.    Apart from this, considering the appeal on  merits as well, we find that the assessee would be  entitled to the benefit in terms of entry 34 of  exemption Notification No.75/84.  The same reads  as under :

Sl.     Description     Rate of Intended use/ No.     of goods        duty    Condition 34      Low Sulphur     Nil     Intended for use as          Heavy Stock             fuel in a refinery Explanation.- "Refinery" means a  refinery wherein  refining of crude  petroleum or shale  or blending of non- duty paid petroleum  products is carried  on.

The Board has issued a circular which reads as  under : Eligibility of concession under Notification  Nos.74/63-C.E., dated 18-5-63 @ 353/77-C-E,  dated 16-12-77. In supersession of the Board’s instructions  contained in F.No.3565-CX-3 dated 16-9-67 it has  been decided that since generation of electrical  energy (electricity as an intermediate product is  incidental in the process and manufacture of

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petroleum products falling under T.I. Nos. 6 to 11AA  the exemption contained in the Notification  No.352/77-C.E., dt. 16-12-77 as amended by  Notification Nos.131/80-C.E., dt. 23-8-80 and  41/82-C.E., dt. 28-2-82 would be available to the  quantity of intermediate product electricity.  The  exemption contained in this notification will,  however, not be available to that quantity of  petroleum products which is used in the generation  of electricity which, in turn, is not used in the  process and manufacture of petroleum products."  [emphasis supplied] [underline by us] 13.     Low Sulphur Heavy Stock is used by the  assessee as fuel in a Thermal Power Plant located  within the refinery area for generating electricity  which in turn is captively consumed for production  of various petroleum products.  Entry No.34 of  Notification No.75/84 read with the clarificatory  circular clearly spells out that the assessee would  be entitled to the benefit of exemption on LSHS to  the extent it is used in Thermal Power Plant located  within the refinery area for generating electricity  which in turn is used in the process of manufacture  of petroleum products."

       Accordingly, the above civil appeals and the cross  appeals are disposed of with no order as to costs.