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PETITIONER: INDIAN FARMERS FERTILISER COOPERATIVE LTD.

       Vs.

RESPONDENT: COLLECTOR OF CENTRAL EXCISE AHMEDABAD.

DATE OF JUDGMENT:       31/07/1996

BENCH: BHARUCHA S.P. (J) BENCH: BHARUCHA S.P. (J) THOMAS K.T. (J)

CITATION:  JT 1996 (7)    44        1996 SCALE  (5)501

ACT:

HEADNOTE:

JUDGMENT:                  THE 31ST DAY OF JULY, 1996 Present:         Hon’ble Mr. Justice S.P. Bharucha         Hon’ble Mr. Justice K.T. Thomas H.N. Salve, Sr. Adv. and K.J. Johan, Adv. with him for the appellant. Joseph Vellappally. Sr. Adv. A.D.N. Rao and P.Parmeswaram, Advs. with him for the respondent.                       J U D G M E N T The following judgment of the Court was delivered; Indian Farmer Fertiliser Cooperative Limited. V. Collector Central Excise, Ahmedabad                       J U D G M E N T BHARUCHA, J:      These are appeals against orders of the Customs, Excise and Gold Control Appellate Tribunal New Delhi.      The Periods  involved in  the appeals  are : 1st April, 1974 to 31st December, 1982 in Civil Appeal No. 5437 of 1990 and January 1983 to April, 1984 in Civil Appeal Nos. 5941-43 of 1990.      By an  Exemption Notification (No. 187/61) issued under the provisions  of Rule  8 of  the Central Excise Rules, the Central Government  expected raw  naphtha falling under Item No. 6  of the  First Schedule to the Central Excise and Salt Act, 1944,  from the  payment of  excise duty  in excess  of Rs.4.36  per   kilolitre  at   15  degrees  Centigrade.  The exemption Notification  applied  "in  respect  of  such  Raw Naphtha as  is used  in the  Manufacture of Ammonia Provided such  Ammonia   is  use  elsewhere  in  the  manufacture  of fertilisers" and the Procedure set out in Chapter - x of the said Rules was followed.      The appellants manufacture urea, which is a fertiliser, at a  plant at Kalol in the State of Gujarat and utilise for the purpose raw naphtha. The raw naphtha was obtained at the concessional rate of duty and was used for producing ammonia

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which, in  turn, was use, partly, directly in the urea plant and,  partly,   indirectly,  in   the  submission   of   the appellants, in  the production  of urea by being employed in off-site plants,  namely, the  water treatment  plant, steam generation plant,  inert gas  generation plant  and effluent treatment plant,  all of  which were  part of  the  integral process of the Manufacturer of urea.      The appellants,  however, received  show cause  notices for the periods aforementioned demanding excise duty at full rate on  the raw  naphtha used  for making ammonia which had been use  in the  water treatment  plant,  steam  generation plant, inert  gas generation  plant, and  effluent treatment plant on  the ground  that such  raw naphtha was not used in the manufacturer  of fertilisers.  The demand was confirmed. In appeal by the appellants, the Collector of Central Excise and Customs  upheld the contention of the appellants insofar as the  ammonia was  used in  the appellants  insofar as the ammonia was  used in water treatment plant, steam generation plant and  inert gas generation plant. This was no the basis that the  inert gas  generated in  the inert  gas generation plant was  required for  purging  the  pipelines  and  other process equipment  of the  ammonia plan every time it had to be started  or shut and, therefore, the process of inert gas generation had  to be  treated as  an integral  part of  the process of  the manufacture  of ammonia, which, in turn, was used for  the manufacture  of  fertilisers.  The  appellants required water  of a  high degree  of  purity  in  the  High pressure boilers and heat exchangers in the ammonia and urea plants. Ammonia  was used  therein for  purifying the water. The  use  of  ammonia  in  the  water  treatment  and  steam generation plant  was, therefore,  also and integral part of the   process of  manufacture of fertilisers. Insofar as the effluent  treatment   plant  was   concerned,  however,  the Collector took  the view  that effluents were waste produced after the  fertilizer had  been manufactured.  The effluents were  treated  for  reasons  hygiene  and  pollution.  Their treatment could  not be  said to  be directly  linked to the process of  manufacture  of  fertilizers  and  the  effluent treatment plant  could not be said to be an integral part of the process  of manufacture  of fertilizers. The demand upon the appellants,  insofar  as  it  related  to  the  effluent treatment plant, was therefore, upheld.      The excise authorities and the appellants filed appeals before the  Tribunal. The  Tribunal reversed the decision of the Collector in so far as it held that the off-site plants, other than  the effluent treatment plant, were a part of the process of  manufacture of  fertilizers. The  Tribunal  held that ammonia  was used for the maintenance  of the plant and equipment for  testing and commissioning the plant and could not be  said to  be utilised  in manufacture. Similarly, the purpose of  the water  treatment  being  essential  for  the protection of  the boiler  and other  process equipment from corrosion, formation  of scales,  etc., the ammonia used for the purpose  could not be said to be used in the manufacture of fertilizers.  The view of the Collector, in so far as the effluent treatment plant was concerned, was upheld.      Emphasis was  laid, and rightly, by learned counsel for the appellant  on the  phraseology  used  in  the  Exemption Notification. The  exemption is  made available  to such raw napha as  is used in the manufacture of ammonia provide such ammonia is used elsewhere in the manufacture of fertilizers. That  the   raw  naphtha   is  used   to  make   ammonia  is unquestioned. The  ammonia is directly in the manufacture of fertilizers; the raw naphtha so used is, it is not disputed, eligible to  the exemption.  The  question  is  whether  the

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ammonia used in the Off-site plants is also ammonia which is "used elsewhere  in the  manufacture  of  fertilizers".  The treatment, steam  generation and inert gas generation plants are part  and parcel  of the composite process that produces as its  end product  urea, which is a fertilizer. These off- site plants  are part of process of the manufacture of urea. There is  no good reason why the exemption should be limited to the  raw  naptha  used  for  producing  ammonia  that  is utilised  directly   in  the   urea  plant.   The  Exemption Notification does  not require  that the  ammonia should  be used directly  in the  manufacture of  fertilisers.  It  the requires  only  that  the  ammonia  should  be  use  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 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.      For our conclusion we drew support from the judgment of this Court  in Collector  of Central Excise, Calcutta-II vs, M/s Eastend  Paper Industries  Ltd., (1989) 4 SCC 244, Where it was  held, "where  any particular  process  .....  is  so integrally connected  with the  ultimate production of goods that, but  for the  process, manufacture  or  processing  of goods would  be commercially  inexpedient, articles required in that  process, would  fall with  the expression  ’in  the manufacture of  goods’ ". This was a reiteration of the view expressed in  M/s J.K.  Cotton Spinning  & Weaving Mills Co. Ltd., vs Sales Tax Officer, Kanpur and Another, (1965) 1 SCR 900. It was there held, "The expression "in the manufacture" takes  in  within  its  compass,  all  processes  which  are directly related to the actual production ". In Collector of Central Excise, New Delhi, vs. M/s Ballarpur Industries Ltd. (1984) 4  SCC 566,  the respondent  manufactured  paper  and paperboard,  "in  the  process  relating  to  which  "sodium sulphate" is  used in  the chemical recovery cycle of sodium sulphate which  form an  essential constituent  of  sulphate which forms  and essential  constituent of  sulphate cooking liquor used  in the  digestion operation  ".  The  Exemption Notification concerned provided exemption to goods which had used as  raw material  or component parts any goods (inputs) falling under  Item 68  of First Schedule to the Act From so much of  the excise  duty leviable thereon as was equivalent to the excise duty paid on the inputs. The Court quoted what had been  said in  Dy, CST  vs. Thomas  Stephen &  Co.  Ltd. namely, "Consumption  must be  in  the  manufacture  as  raw material or  of other components which go into making of the end product  ................" and  observed that, correctly apprehended, that  statement did  not  lend  itself  to  the understanding that  for something to qualify itself as a raw material it  had necessarily and in all cases to go into and be found  in the  end product.  The Court  also quoted  with approval the  case of Eastend Paper Industries Limited cited above.      That leaves us to consider whether the raw naphtha used to produce  the  ammonia  which  is  used  in  the  effluent treatment plant  is eligible  for the  said exemption, It is too Late  in the  day to take the view that the treatment of effluents from a plant is not an essential and integral part of the  process of  manufacture in  the plant.  The emphasis that  has  rightly  been  laid  in  recent  years  upon  the environment and  pollution control  requires that  all plats which emit  effluents should  be so  equipped as  to rid the

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effluents of  dangerous properties.  The apparatus  used for such treatment  of effluents  in a  plant manufacturing    a particular  end   product  is   part  and   parcel  of   the manufacturing process  of that end product, The ammonia used in the  treatment of  effluents from  the urea  plant of the appellants has,  therefore to  be held  to  be  use  in  the manufacture  of  urea  and  the  raw  naphtha  used  in  the manufacture of  such ammonia  to be  entitled  to  the  said exemption.      In the result, the appeals are allowed. The order under appeal are  set aside.  It held that the raw naphtha used to produce ammonia  which is used in the water treatment, steam generation, inert  gas  generation  and  effluent  treatment plants of  the urea  plant of  the appellants is entitled to the exemption  provided by  the Exemption  Notification  NO. 187/61 as amended from time to time.      There shall be no order as to cost.