Ms Rashtriya Chemicals and Fertilizers Limitedv.Commissioner of Central Excise and Service Tax

Synopsis

This judgment resolves a protracted dispute concerning the eligibility of Naphtha procured by a public sector fertilizer manufacturer for exemption from central excise duty under Notification Nos. 75/1984-CE and 4/1997-CE. The appellant, Rashtriya Chemicals and Fertilizers Limited (RCF), had procured Naphtha at nil rate of duty by following the Chapter X procedure and obtaining CT‑2 certificates, certifying that the Naphtha was intended for use in the manufacture of fertilizer or ammonia. The revenue alleged that a portion of the Naphtha was used for non‑fertilizer purposes (such as generating electricity for other plants and selling surplus power to the State Electricity Board) and therefore the exemption was not available. After several rounds of litigation, the CESTAT confirmed the duty demand, interest and penalty under Section 11AC of the Central Excise Act, 1944. The Supreme Court reversed, holding that the exemption notifications required proof of intended use, not actual use, and that RCF had consistently intended the Naphtha for fertilizer manufacture. The Court further held that the extended period of limitation under the proviso to Section 11A was not invocable as there was no deliberate suppression or intention to evade duty, especially given that the entire exercise was revenue‑neutral. The appeals were allowed and the orders‑in‑original and the CESTAT order were set aside.

2. Basic Information of the Judgment

Case Title: M/s. Rashtriya Chemicals and Fertilizers Limited vs. Commissioner of Central Excise and Service Tax (LTU) (with connected appeals)

Civil Appeal Nos.: 2219‑20 of 2013 and Civil Appeal arising out of SLP (Civil) No. 21441 of 2013

Bench: Justice Ujjal Bhuyan and another learned judge (name not specified in the extract)

Judgment Author: Justice Ujjal Bhuyan

Date of Decision: March 24, 2026

Citation: 2026 INSC 285

Appeal From: (i) Order dated 27.03.2012 of the CESTAT, Mumbai in Appeal Nos. E/671/10‑Mum and E/801/10‑Mum; and (ii) Order dated 21.02.2013 of the High Court of Judicature at Bombay in Central Excise Appeal No. 129 of 2012.

3. Legal Framework

This judgment involves the interpretation of exemption notifications issued under the Central Excise Act, 1944, the provisions relating to recovery of duty and limitation, and the law concerning “intended use”.

A. Key Provisions of Law:

• Central Excise Act, 1944:
  Section 5A: Power to grant exemption from duty of excise.
  Section 11A (as it stood prior to 08.04.2011): Recovery of duties not levied or not paid or short‑levied or short‑paid. Sub‑section (1) provided a normal limitation period of one year. The proviso extended the period to five years in cases of fraud, collusion, wilful mis‑statement, suppression of facts, or contravention of provisions with intent to evade duty.
  Section 11AC: Imposition of penalty for short‑levy or non‑levy of duty in certain cases.

• Central Excise Rules, 1944:
  Rule 173Q: Confiscation and penalty for contravention by a manufacturer, producer, etc.
  Chapter X (Rules 192 to 196BB): Procedure for obtaining remission of duty on goods used for special industrial purposes.

• Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001:
  Rule 6: Recovery of duty where subject goods are not used for the intended purpose.

• Exemption Notifications:
  Notification No. 75/1984-CE dated 01.03.1984: Exempted raw Naphtha from duty when intended for use in the manufacture of fertilizers and ammonia, subject to satisfaction of the proper officer and compliance with Chapter X procedure.
  Notification No. 4/1997-CE dated 01.03.1997: Similarly exempted Naphtha and natural gasoline liquid for use in the manufacture of fertilizer or ammonia, subject to conditions (the same as in the earlier notification).

B. Related Precedents (Discussed in the Judgment):

• Dalmia Dadri Cement Ltd. v. Commissioner of Sales Tax (1974) 3 SCC 270: Held that in a tax exemption provision, the phrase “for use” means “intended for use”. The actual use of the goods for a non‑exempt purpose does not defeat the exemption if the goods were intended for the exempt purpose at the time of supply.

• Steel Authority of India Ltd. v. Commissioner of Central Excise (2009) 13 SCC 273: Under an exemption notification requiring that Naphtha be “intended for use” in the manufacture of fertilizer, the benefit was available even if, due to operational constraints, the reformed gas had to be vented out and did not ultimately yield fertilizer. The key was the intention at the time of feeding the raw material.

• Pushpam Pharmaceuticals Company v. Collector of Central Excise, Bombay (1995) Supp 3 SCC 462: For invoking the extended period of limitation under Section 11A, the act of suppression must be deliberate. Where facts are known to both parties, omission to do something does not amount to suppression.

• Nirlon Limited v. Chief Commissioner of Excise (2022) 13 SCC 242: Where the exercise is revenue‑neutral and the assessee could not have derived any benefit, the extended period of limitation cannot be invoked.

4. Relevant Facts of the Case

1. The Appellant: Rashtriya Chemicals and Fertilizers Limited (RCF) is a public sector undertaking engaged in the manufacture of fertilizer (urea), ammonia and other chemicals at its factory in Thal, Alibaug, Maharashtra.

2. Procurement of Naphtha: During the period November 1996 to February 2005, RCF procured Naphtha from Hindustan Petroleum Corporation Limited (HPCL) at nil rate of duty by availing the benefit of exemption under Notification Nos. 75/1984-CE and 4/1997-CE (as amended). RCF followed the Chapter X procedure and obtained CT‑2 certificates from the jurisdictional Commissioner after declaring that the Naphtha was intended for use in the manufacture of fertilizer or ammonia.

3. Use of Naphtha: Naphtha was burnt along with natural gas in a steam generation plant to produce steam. The steam was used primarily in the fertilizer and ammonia plants. A part of the steam was also used in turbo generators to produce electricity for captive consumption; a small portion of the electricity was used in a chemical plant and for sale to the Maharashtra State Electricity Board (technical compulsion). The revenue claimed that Naphtha was thus diverted for non‑fertilizer purposes.

4. Show Cause Notices: The first show cause notice dated 29.08.2001 covered the period November 1996 to March 2001, demanding duty of ₹28.55 crores. Subsequently, 25 more show cause notices were issued for the period April 2001 to February 2005.

5. Adjudication and Remands: The matter went through multiple rounds of adjudication, appeals to CESTAT, and remands. Finally, the original adjudicating authority passed two orders‑in‑original (27.01.2010 and 04.02.2010) confirming the duty demand, interest and penalty under Section 11AC, though penalties under Rule 173Q and Rule 25 were set aside.

6. CESTAT Order (27.03.2012): The CESTAT partly allowed the appeals – it confirmed the duty and interest, upheld the penalty under Section 11AC, but set aside the penalties under Rule 173Q and Rule 25. It held that since Naphtha and natural gas were burnt together, the revenue’s method of proportionate allocation was reasonable; and that the appellant had failed to prove that the Naphtha was used exclusively for the intended purpose.

7. Rectification Application: RCF filed an application for rectification before CESTAT under Section 35C(2) of the Central Excise Act, which was rejected on the ground that the grounds not argued during the hearing need not be considered. The High Court dismissed the appeal against that rejection.

8. Appeals to Supreme Court: RCF filed civil appeals against the CESTAT order and the High Court’s order on the rectification application.

5. Issues Identified by the Supreme Court

The Court framed the following issues:

1. Whether the appellant, having procured Naphtha under the exemption notifications by following the prescribed procedure and obtaining CT‑2 certificates, was entitled to the benefit of exemption despite a fraction of the Naphtha (through steam and electricity) being used for non‑fertilizer purposes.

2. Whether the extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act, 1944 was invocable in the facts of this case.

3. Whether the imposition of penalty under Section 11AC was sustainable.

4. Whether the CESTAT was justified in rejecting the rectification application and whether the High Court’s order on that issue survives in light of the decision on merits.

6. Ratio Decidendi (The Reasoning and Decision of the Court)

The Supreme Court allowed the appeals and set aside the orders‑in‑original and the CESTAT order. The reasoning is as follows:

A. Interpretation of “Intended Use”

• The Court examined the exemption notifications, noting that Condition 3 required proof to the satisfaction of the proper officer that the goods were cleared for the “intended use” (i.e., for manufacture of fertilizer or ammonia). Condition 4 required compliance with Chapter X procedure where the use was elsewhere than the factory of production.

• Relying on Dalmia Dadri Cement Ltd. and Steel Authority of India Ltd., the Court held that the exemption hinges on the intention at the time of procurement, not on the actual subsequent use in every molecule. As long as the goods were intended for the specified purpose and the requisite procedure was followed, the exemption is available.

• In the present case, Naphtha was procured with the clear intention of using it in the manufacture of fertilizer and ammonia. The fact that a small portion of the steam (and consequently the electricity generated) was used for non‑fertilizer purposes did not defeat the exemption, because the intention was never to divert Naphtha for other uses. The shortfall of natural gas necessitated the use of Naphtha to maintain steam generation, and the plant’s integrated operations meant that some energy inevitably flowed to other units. The Court observed that the revenue’s method of proportionate allocation was based on speculation and did not account for the fact that the Naphtha procured was itself insufficient to meet the total steam requirement for fertilizer alone.

B. Extended Period of Limitation

• The normal limitation for issuing a show cause notice under Section 11A (pre‑2011) was one year. All the show cause notices here were issued beyond that period, so the revenue relied on the proviso (five years) alleging suppression, wilful mis‑statement, or intent to evade duty.

• The Court held that the extended period was not invocable. There was no deliberate suppression: the appellant had disclosed all relevant facts in its applications for CT‑2 certificates, and the revenue authorities had issued those certificates after being satisfied. The interpretation of the exemption notification was a matter of law, and any omission to pay duty was due to a bona fide understanding of the scope of exemption, not suppression.

• Moreover, the Court noted that the entire exercise was revenue‑neutral. RCF is a public sector undertaking that receives subsidies from the Central Government. Any excise duty it would have paid on Naphtha would have been offset by a corresponding increase in subsidy or would have been available as CENVAT credit for other products. Therefore, there was no intention to evade duty, and the extended period could not be invoked.

C. Penalty under Section 11AC

• Since the extended period was not available, the demand for duty was time‑barred; consequently, the penalty under Section 11AC, which is predicated on a valid demand, also could not survive.

D. Rectification Appeal

• In view of the main appeals being allowed, the appeal arising from the High Court’s order on the rectification application became academic and was disposed of as infructuous.

7. New Legal Principles Established / Reiterated

This judgment reinforces and clarifies several settled principles of central excise law:

1. “Intended Use” vs. “Actual Use”: The Court reaffirmed that where an exemption notification uses the expression “for use” or “intended for use”, the benefit is not lost merely because, due to operational exigencies or integrated plant processes, a small portion of the goods is not physically traceable to the exempted final product. The test is the dominant intention at the time of procurement.

2. Extended Limitation – Strict Interpretation: The proviso to Section 11A(1) is penal in nature and must be strictly construed. The burden lies on the revenue to establish deliberate suppression, fraud, or wilful mis‑statement with intent to evade duty. Mere non‑payment arising from a bona fide interpretation of a notification does not attract the extended period.

3. Revenue Neutrality as a Factor: Where the duty sought to be recovered, if paid, would be offset by a corresponding credit or subsidy, the inference of intent to evade duty is rebutted. This is particularly so in the case of public sector undertakings whose finances are linked to government subsidies.

4. CT‑2 Certificates as Evidence of Satisfaction: When the jurisdictional officer issues a CT‑2 certificate after examining the application, it raises a presumption that the officer was satisfied about the intended use. The revenue cannot later allege suppression on the same facts without demonstrating that the assessee concealed material information.

8. The Court’s Analysis and Examination of Concepts

• Deconstruction of the Exemption Notifications: The Court carefully parsed the language of Condition 3 and Condition 4. It noted that the first condition only required satisfaction of the officer before clearance; the second condition (Chapter X procedure) was a procedural safeguard. The revenue erroneously imported a requirement of “exclusive” use, which was not found in the notifications.

• Integrated Plant Operations: The Court accepted the appellant’s explanation that the steam generation plant was a utility serving the entire factory; the Naphtha was fed into the common system and the energy produced was distributed. It held that in such integrated plants, it is impracticable to trace every molecule of Naphtha to a specific end‑use, and the law does not mandate such tracing when the intended use is established.

• Proportional Allocation as Speculative: The revenue’s methodology – calculating the percentage of steam used for non‑fertilizer purposes and proportionally allocating Naphtha consumption – was held to be based on assumptions not borne out by the actual process. The Court observed that natural gas and Naphtha were burnt simultaneously; the steam generated was a composite product, and the revenue’s allocation was arbitrary.

• Limitation – Deliberate Suppression Not Made Out: The Court examined the record and found that the appellant had consistently disclosed the integrated nature of its operations. The fact that it had obtained CT‑2 certificates after due scrutiny indicated that the authorities were aware of the intended use. There was no positive act of suppression; the difference was one of interpretation, which cannot be equated with fraud.

9. Critical Analysis of the Judgment

This judgment is a significant affirmation of the principles of interpretative lenity in favour of the assessee in excise matters, especially where the exemption is intended to encourage production of essential goods like fertilizers.

• Strength – Correct Interpretation of “Intended Use”: The Court’s reliance on Dalmia Dadri Cement and SAIL correctly aligns with the established jurisprudence. It prevents the revenue from denying exemption on hyper‑technical grounds when the overall purpose of the exemption is served. The fertilizer industry, being subsidised and regulated, should not be burdened with demands that would ultimately be passed on to the government anyway.

• Limitation – Safeguard Against Harassment: By holding that the extended period cannot be invoked in the absence of deliberate suppression, the Court protected the assessee from stale claims. The fact that the show cause notices were issued years after the period concerned, and after multiple rounds of litigation, highlights the need for such protection.

• Revenue Neutrality as a Decisive Factor: The Court’s observation that the exercise was revenue‑neutral was a pragmatic consideration. It underscores that the law should not be used to penalise where there is no loss to the exchequer. This is particularly relevant in the context of public sector undertakings where subsidy mechanisms ensure that any duty paid is effectively reimbursed.

• Potential Critique – Fact‑Specific: The judgment is heavily fact‑specific; it does not lay down a universal rule that all integrated plants are exempt from proportionate allocation. However, the principles regarding “intended use” and limitation are of general application.

• Impact on Future Litigation: The judgment will help in discouraging revenue authorities from routinely invoking the extended period in cases of interpretational ambiguity. It also reinforces the binding nature of CT‑2 certificates once issued after due satisfaction.

10. Final Outcome

The Supreme Court allowed Civil Appeal Nos. 2219‑2220 of 2013 and set aside the orders‑in‑original dated 27.01.2010 and 04.02.2010 as well as the CESTAT order dated 27.03.2012. The demand for duty, interest and penalty under Section 11AC were quashed. The Civil Appeal arising out of SLP (Civil) No. 21441 of 2013 (relating to the rectification application) was disposed of as having become academic. No costs were ordered.

11. (MCQs)

1. Under the exemption notifications considered in this judgment, the benefit of nil duty on Naphtha was available if the goods were:?
a) Actually used exclusively in the manufacture of fertilizer.
b) Intended for use in the manufacture of fertilizer or ammonia.
c) Sold to a registered dealer.
d) Procured from a government company.

2. The Supreme Court held that the extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act, 1944 could not be invoked because:?
a) The show cause notices were issued beyond five years.
b) The appellant was a public sector undertaking.
c) There was no deliberate suppression or intent to evade duty, and the facts were known to the revenue when CT‑2 certificates were issued.
d) The duty demand was below the prescribed limit.

3. Which of the following principles was reiterated by the Court while interpreting the exemption notification?
a) Exemption notifications must be strictly construed against the assessee.
b) The words “for use” in an exemption notification mean “intended for use”.
c) Actual physical tracing of the goods to the final product is mandatory.
d) Exemption is available only if the goods are used exclusively for the exempted purpose.

4. In this case, the revenue’s method of calculating the demand was based on:?
a) Direct measurement of Naphtha consumed in non‑fertilizer plants.
b) Statements of the appellant’s officials admitting diversion.
c) A proportionate allocation of steam consumption and energy use, which the Court found speculative.
d) A formula prescribed by the Central Government.