1. These appeals relate to a common issue and are.therefore, disposed of by this common order. Appeal Nos. E/2680 to 2682/86-C are appeals by the Indian Farmers Fertilizer Co-operative Ltd. against a common order-in-appeal No. 300-302/AHD-98-100/86 dated 30-9-1986. This order is of the Collector of Central Excise(Appeals) Bombay which disposed of three orders of the Assistant Collector of Central Excise(N.G.) Ahmedabad dated 24-11-1983, 3-5-1984 and 28-9-1984. Appeal No.E/2640/89-C has been filed by the Collector of Central Excise, and Customs, Ahmedabad under Section 35-E(1) of the Central Excises and Salt Act, 1944 in terms of a direction from the Central Board of Excise & Customs dated 9-2-1989. This order is passed in exercise of powers conferred under Section 35E(1) and it is an order by which the Collector of Central Excise, Ahmedabad has been directed to file an application before the Tribunal for looking into the legality and propriety of an adjudication order dated 12-2-1988 passed by the Collector of Central Excise & Customs, Ahmedabad in the case of M/s.
Indian Farmers Fertilizer Co-operative Ltd. (IFFCO). The brief facts of the case leading to this application under Section 35E are that IFFCO manufactures fertilizers falling under the erstwhile Tariff Item 14HH and were availing of exemption under Notfn. 187/61 dated 23-12-1961 under which raw naptha is exempt from payment of so much of excise duty leviable thereon as in excess of Rs. 4.15 per KL on condition that the Collector of Central Excise is satisfied that such raw naptha is intended for use in the manufacture of fertilizers and the Chapter X procedure is followed. Therefore, the concession is available, according to the department, only if raw naptha was used in the manufacture of Ammonia which was further used in the manufacture of fertilizers. The departmnent's case is that IFFCO were manufacturing ammonia, a part of which was put to different use i.e.(i) in the inert gas plant;(ii)in the water treatment plant and (iii) in the effluent treatment plant, for which it was ascertained that a total quantity of 12074241MT of Ammonia was utilised for the purpose other than manufacture of fertilizers during the period 1-4-1974 to 31-12-1982. A quantity of 5248.389 KL of raw naptha which was used for the above said quantity of Ammonia was, therefore, not found eligible for the concessional rate of duty under Notfn. 187/61. An amount of Rs. 40,00,040.10 was found payable by IFFCO as differential duty.
Proceedings were initiated for the recovery of this duty and the Asstt.
Collector adjudicated the case after issue of 10 Show Cause Notices in a combined order on 11-7-1984 holding that IFFCO were not eligible for the concessional rate of duty on 5248.389 KL of raw naptha.
The Assistant Collector also held that since the demand was raised under Rule 196 of Central Excise Rules, limitation for recovery will not apply. The case thereafter was taken up in appeal before the Appellate Collector, who remanded it to the Assistant Collector who once again on 22-11-1986 passed another order again confirming the demand for differential duty. This order was once again challenged in appeal which was once more remanded on the ground that in 1986, the Assistant Collector in law had no power to invoke the longer period under Section 11-A for demanding duty. The Collector, therefore, took up the adjudication of the case himself and passed an order dated 12-2-1988 (issued on 15-2-1988) in which he held that although there was no ground to allege suppression of facts against IFFCO, yet the demand was being made under Rule 196 of Central Excise Rules and not under Section 11-A and that for this reason, no limitation will apply.
Regarding use of Ammonia in the inert gas plant, water purification and for treatment of effluents, the Collector held that the use of raw naptha for treatment of effluents was not eligible for exemption whereas the quantity used in the other two plants, 'inert gas and water treatment', was eligible for the exemption. The Central Board of Excise & Customs, on a review of this order of the Collector came to the view that the Collector's order is not legal and proper to the extent that the observations of the Collector regarding use of Ammonia for inert gas plant and water treatment was part of the integrated process of manufacture of Ammonia, is not technically correct leading to the present appeal by the Collector before the Tribunal.
2. In the other three appeals, by the common order, othe Collector of Central Excise (Appeals) Bwnbay had upheld the Asstt. Collector's order by which the Assistant Collector had held that use of Ammonia in the inert gas plant, treatment of water and treatment of effluents cannot be considered as used for the manufacture of fertilizers. IFFCO, being aggrieved by this order have filed three separate appeals.
3. Shri Lachman Dev, the learned consultant, appearing for IFFCO submitted that the order of the Collector of Central Excise, Ahmedabad holding that use of Ammonia for gas generation and purification of water was an integrated process of manufacture of fertilizer needs no modification. He referred in this context to a clarification issued by the Central Board of Excise & Customs dated 29-5-1970 wherein the Board had said that the exemption under Notification 187/61 is open to all raw naptha, whether used as feed stock or as process fuel, so long as it is proved to the satisfaction of the Collector that the same is used in the manufacture of fertilisers. He also relied upon the instructions contained in the Board's letter of clarification F. No. 83/11/72-CX. 3 dated 22-2-1974 giving the text of the opinion of technical experts in which in para 2(b), there is a reference to purging of the plant and pressure testing wherein Nitrogen is circulated through the catalyst which is gradually heated up, by heating up the nitrogen in a fired heater using naphtha. Shri Lachman Dev also drew attention to the Operating Manual to show that use of raw naptha for inert gas plant and for purification of water was an integral process in the manufacture of fertiliser. The learned consultant explained that in the inert gas plant, generation of nitrogen is required for purging the pipelines and other process equipment of the Ammonia plant which is an essential and integral part of the fertiliser (urea plant) and that for treatment of tube-well water to render it fit and usable in boilers and other equipment will also be in the course of the manufacture of urea fertilisers. The purposes for which Ammonia is used are, according to IFFCO, essential for manufacture of urea since such manufacture would not be possible to be completed without first producing nitrogen required for purging the pipelines and other process equipment and for preservation of catalysts and without the availability of high purity water for use as a basic input in the boilers and the steam produced in the boilers being used exclusively for urea production. Shri Lachman Dev also cited the case law for the interpretation of the phrase "used in the manufacture of by citing the Supreme Court decision reported in AIR 1965 SC 1310 in the case of J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. The Sales Tax Officer. The Court observed that the expression 'in the manufacture of goods' should encompass the entire process carried on of converting raw materials into finished goods. He also quoted the Tribunal's decision in the case of Collector of Central Excise v. Hindustan Lever Ltd. -1990 (47) ELT 646 that the use of a specified raw material for the manufacture of a specified finished product need not be direct but through an intermediate stage when that intermediate stage is inevitable in the manufacturing process. As for limitation, the learned consultant pointed out that the longer period for more than six months under Section 11-A is not available to the department in this case and the Collector himself in his adjudication order "has given such a finding as for the demand being made under Rule 196 of Central Excise Rules, the learned consultant contended that this rule was not invoked in the Show Cause Notice.
4. Shri Narasimha Murthy, the learned Departmental Representative appearing for the department pointed out that in the Show Cause Notice issued under Section 11-A was cited only in view of the remand order by the Collector (Appeals) but the adjudicating Collector had held that the limitation under that Section will not apply as it was a case of demand under Rule 196 being essentially a case of excisable exempted material not accounted for. In such a situation, according to the department, Section 11-A does not apply. As regards the eligibility of raw naptha used in the production of Ammonia which is utilized for purging the pipe line and for water treatment, the learned DR pointed out that purging of the pipe line and process equipment is a stage prior to the manufacture itself i.e. the stage of start up of the plant which is, therefore, not directly connected with manufacture. It is not directly relatable to the actual production which, in fact, is a criterion even according to the Supreme Court case cited by IFFCO. He further pointed out that even according to IFFCO, the use in the inert gas plant was also for preservation of the catalyst. Therefore, it is not used in the process of manufacture of fertilizers. It may be that such use of Ammonia is essential for the running and maintenance of the plant but use in the manufacture of fertilizer is entirely different.
The Board's clarification also would not be read to mean that such usages in the plant maintenance would be eligible for the exemption.
5. We have carefully considered the submissions made by the learned consultant and the learned DR. The question is regarding the department's denial of the exemption under Notification 187/61 to raw naptha at concessional rate intended for use in the manufacture of fertilizer which is used for other than fertilizer manufactured, according to the department, in the inert gas plant, water treatment plant, and effluent treatment plant, known as Offsite plant. It has been explained by IFFCO that inert gas plant uses Ammonia for production of nitrogen, which is required for purging pipe line and other equipments of the plant every timeit has to be started or shut down for changing the catalyst and for maintenance. It has also been explained further that the Ammonia plant and Urea plant require substantial quantity of water for in-process use and steam generation.
This water is required to be high purity water while water from the tube-well water available to them is poor; it has to be subjected to purification in the water treatment plant, which is done with Ammonia gas obtained from Ammonia plant and the water purification is done by ION exchange method. On a careful consideration of the details of the usages of Ammonia in the off-site plant, we are unable to agree with IFFCO that these usages are an integral process of manufacture of fertilizer. The use in the inert gas plant, it is seen, is essential for the maintenance of the plant and equipment including pipe line.
This is reflected also in the Board's clarification referred to by IFFCO. It is apparent from para 2 (a) of the text of the opinion given by Experts that 'due to the explosive and inflammable conditions that would prevail in Ammonia plants, it is essential that the plant is purged free of oxygen and maintained in that condition during the various stages of testing and commissioning'. This would indicate that the use of Ammonia is essential for the maintenance of the plant and equipment and is meant for testing and commissioning of the plant.
Coming to the use as a water treatment chemical, it is observed that the water available from tube wells is not of high purity and, therefore, it has to be purified for which Ammonia is used as a water treatment material by ION exchange method. What is the purpose of this water treatment? It is for ensuring high purity water. Water feed is used in the boilers and has to be of high purity so as to prevent the formation of scales, corrosion and other types of damage to the boilers and pipe lines, which is, again, essential and useful for the maintenance of the machinery, namely, the boiler and the pipe lines and the process equipment. What is required is water treatment to remove from it impurities, for which water treatment chemicals are available, and it is only that IFFCO has chosen to use Ammonia itself for water treatment by ION exchange method. Therefore, the purpose of the water treatment being in our view, essential for the protection of boiler and other process equipment from corrosion, formation of scale etc. it cannot, therefore, be said to be used in the manufacture of fertilizer.
In coming to this view, we also bear in mind the principles laid down by the Supreme Court decision in the Case of Collr. of C. Ex. v.BallarpurIndustries Ltd. wherein Hon'ble Supreme Court held that to be a raw material used in the manufacture for the purposes of Notification 201/79, the relevant test is not its presence in the end-product, but dependence of the end-product for its essential presence at the delivery end of the process, and that the Supreme Court further held "this quality should coalesce with the requirement that its utilisation is in the manufacturing process as distinct from the manufacturing apparatus", (emphasis supplied). In the present case, we find that the use of Ammonia in the inert gas plant as well as in the water treatment plant is essential for maintenance of the manufacturing apparatus, and, in this view of the matter, we hold that the Asstt. Collector's order as upheld by the Collector (Appeals) denying the exemption to that quantity of raw naptha used in the manufacture of Ammonia, which was utilized in the Off-site plant, is maintainable, and accordingly, the appeals of IFFCO are rejected.
6. It has been argued that the demand is time barred under Section 11-A and also it cannot be sustained by invoking Rule 196 of Central Excise Rules either, because this Rule has not been cited in the Show Cause Notice. We have perused the Show Cause Notice issued by the Collector dated 16-6-1987. This Show Cause Notice clearly brings out that the duty is demanded because of the fact that the appellants had utilized raw naptha received under concessional Notification 187/61 in the manufacture of Ammonia which was put to uses other than manufacture of fertilizers. The Show Cause Notice in paras 2 and 3 thereof states as follows: "2. Whereas it appears that M/s. IFFCO, Kalol (hereinafter referred to as the assessee) were engaged in the manufacture of fertilizers falling under T.I. 14HH of the First Schedule to the Central Excises & Salt Act, 1944, as it stood at the relevant time. The assessee was bringing raw naptha under concessional rate of duty vide Notification No. 187/61 dated 23-12-1961 for use in the manufacture of fertilizers. The concession was available under the said notification provided the raw naptha was used in the manufacture of Ammonia, which was further used in the manufacture of fertilisers.
M/s. IFFCO Ltd. Kalol were manufacturing Ammonia in their factory, which was put to different uses apart from its use in the manufacture of fertilizers for which they had obtained L-6 licence and were availing of the benefit of aforesaid exemption under Notification No. 187/61. They had applied to the Collector of Central Excise, Ahmedabad on 12-6-1974 for amending their L-6 licence for diversion of a part of Ammonia obtained from raw naptha.
Under their L-6 licence for non-fertiliser purposes on the understanding that they would pay pro-rata duty on raw naptha so used in the manufacture of Ammonia diverted to non-fertilizer purpose at normal rate without any concession. Necessary permission to that effect was granted by the Collector and this fact was also duly incorporated in their L-6 licence.
3. Whereas on scrutiny of records, it was observed that the assessee was removing Ammonia for uses other than fertilisers i.e. they had used some quantity of Ammonia in off site plants i.e. Inert Gas Plant, Water Treatment Plant and Effluent Treatment Plant.
Therefore, they were not eligible for exemption under Notification 187/61-CE dated 23-12-1961." It is thereafter that Section 11-A has been cited. Therefore, it is clear that Show Cause Notice is essentially issued for recovering duty on that quantity of raw naptha used for purposes other than the purpose for which it was allowed to be received into the appellant's factory under concessional rate. This is clearly covered by the provisions of Chapter X. Therefore, the fact that Rule 196 was not specifically cited in the Show Cause Notice, will not invalidate the demand for duty. The goods could be allowed clearance at the exempted rate only in terms of the Notification 187/61 which stipulates the follow ing of the procedure under Chapter X with the issue of L-6 licence under Rule 192.
The appellants had also executed a bond for the proper accountal and utilization of the material received under the notification. In such circumstances, in the appellant's own case under the very same notification, it has been held by this Tribunal in the case reported in 1989 (41) ELT 474 that limitation under Section 11-A of the Central Excises & Salt Act, 1944 is not applicable for demanding duty in terms of Rule 196. In coming to the decision, the Tribunal had noted earlier decisions of the CEGAT in the case of Collector of Central Excise v.Amber PaintsBajaj Auto Ltd. v. Collector of Central Excise - 1987 (31) ELT 970 wherein the Tribunal had held that Rule 196 does not stipulate a time limit for the demand and that the ground for invoking Rule 196 cannot be limited by the limitation provided in Rule 10 of Central Excise Rules which caters to entirely different situation. The Tribunal expressed the same view in the Bajaj Auto Ltd. case in its paras 11 and 12 as follows: "11. After all this, however, the proceedings were initiated for recovery of duty under Rule 196 of the Central Excise Rules, 1944.
This Rule prescribes no time limit for recovery of duty. Chapter X has its own rules for clearances under exemption. After clearances, the responsibility for the duty is transferred by an elaborate procedure to the buyer-user of the bounty-fed goods. This is for reasons that are obvious. Once the property in the goods changes hands, the manufacturer, who is the prime target of duty recovery proceedings, fades out and loses control over the disposal of the goods. The gratuity achieves completion only by the use of the goods, and use is beyond the manufacturer's power. The receiver of the gratuity, in fact, is not the manufacturer but the buyer, because the manufacturer sells the goods, less the duty which, even when it reaches him from the buyer, is rerouted to the exchequer.
Since it is the buyer's use that consummates and concludes the exemption process, it is in the fitness of things that he should also be the one who must ultimately answer for the duty.
12. The time limit that the law provides for demands is applicable only to the factory that manufactures the goods. For example, time limit must start ticking from the so called relevant date. None of the relevant dates can fit a demand under Rule 196. The time limit provided by Section 11-A of the Act cannot fence these demands in".
Therefore, we do not find any substance in the arguments that the demand cannot be sustained under Rule 196. The appeal of the department is only to the extent of the correctness of the Collector of Central Excise, Ahmedabad's adjudication holding that in the Off-site plant, usage of Ammonia is in the process of fertilizer manufactured and since we have already held that such a conclusion is not well founded, the department's appeal is allowed.