i.O.C. Limited Vs. Cce - Court Judgment

Excerpt:
1. these appeals of indian oil corporation raise a common issue i.e whether reduced crude oil (r.c.o) low sulphur heavy stock (lshs) captively consumed by the appellant were eligible for exemption from central excise duty. acordingly, all the appeals are disposed of by this common order.2. the appellants are engaged in the refining of crude petroleum which leads to the manufacture of various petroleum products. they produced rco/lshs, which are residual fuel oils, and used by them captively in the generation of electricity, which electricity in turn was used in the refinery for refining crude petroleum. the appellants claimed exemption for rco/lshs which had been captively consumed based on exemption notifications issued from time to time (notification nos.352/77 dated 16.12.77 no. 75/84, no. 67/95 and 8/96 etc.). however, impugned orders held that the exemption was not available on the ground that the exemption is available only to rco/lshs directly used in the oil refinery and not to rco/lshs used in the manufacture of electricity which is not liable to central excise duty, the fact that electricity produced from rco/lshs is also used in petroleum refining notwithstanding.3. the appellant's contention is that these are cases of indirect use of the specified exempted material and the fact that use is indirect is no ground for denial of the exemption. during the hearing of the appeals, learned counsel for the appellants pointed out that the issue is well settled that the emergence of an intermediate product and the indirect nature of the use are no ground for denial of exemption to specified inputs. he cited the decision of the southern bench of the cegat in the case of hindustan petroleum corporation ltd. v. cce, hyderabad 2000 (124) elt 323 and points that in regard to use of naptha in identical manner, the tribunal had held that indirect use, namely, production of electricity/steam which is used in manufacturing process, would also satisfy the requirement for use of a material in or in relation to the manufacture of final products. learned counsel also submitted that the objection regarding indirect use cannot have any acceptance in view of supreme court's decision in case of jaypee rewa cement v. commissioner of central excise . the learned counsel pointed out that in regard to dispute relating to eligibility of inputs to modvat credit the apex court had ruled that there could be no manner of doubt that even in respect of indirect use of specified inputs credit manufacture would be allowed credit on the duty paid in respect of the inputs. learned counsel elaborated that in the jaypee rewa cement case, the apex court was dealing with the question of eligibility of explosives used in mining and held that the explosives used in the mining of lime stone which go into the production of cement was also used in the manufacture of cement. learned counsel also referred to the decision of the larger bench of this tribunal in the case of ballarpur industries ltd., on the question of modvat credit on fuel oils such a lshs captively consumed in the generation of electricity and held that indirect use of inputs such as use in electricity generation is also specified use. the learned counsel also pointed out that this position has been accepted in the appellant's own case by the commissioner of central excise, patna in regard to use of lshs in the appellant's units at barauni refinery (order in original no. 01-02/mp/com/2001 dt. 29.6.2001), relying on the decision of the tribunal in the case of hindustan petroleum corporation limited.4. the learned counsel for the appellants also pointed out that the impugned orders are contrary to board's circular issued in the context of notification no. 352/77 and cannot be sustained for that reason alone. he pointed out that the board had specifically clarified in its f. no. 89/13/82-cx-3 dated 6.7.83 that generation of electrical energy as an intermediate product is incidental to the process of manufacture of petroleum products and exemption contained in the notification no.352/77-ce dated 16.2.77 asmended notifications no. 131/80-ce dated 23.8.80, 41/82-ce dated 28.8.82 would be available.5. we have perused the records and have heard the learned counsel representing the central government also. we find that the issue raised in these appeals is covered by the decision of this tribunal in the case of hindustan petroleum corporation ltd. and the circular of the board. we read the circular: elegibility of concession under notification nos. 74/63-ce, dated 18.5.63 & 353/77-ce, dt. 16.12.77. in supersession of the board's instructions contained in f. no. 35-65-cx-3 dt. 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 petroleum products falling under t.i. nos. 6 to 11aa the exemption contained in the notification no. 352/77-ce dt. 16.2.77 as amended by notification nos. 131/80-ce dt. 23.8.80 and 41/82-ce 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.6. the crux of the dispute is whether indirect use of an exempted material would also satisfy the requirement or use of the exempted product for a particular purpose. the supreme court's judgment in the case of mis. jaypee rewa cement case, even though rendered in the context of modvat scheme, contains authentic pronouncement of law on the subject. the apex court held that there could be no manner of doubt that the use of inputs in the manufacture of intermediate products which is used in the manufacture of the final product satisfies the requirement of use in the manufacture of final products. thus, the issue regarding indirect use remains settled in favour of the appellants. board's circular dated 6.7.83 also clarifies that the manufacture of electricity at the intermediate stage is only incidental and does not affect the eligibility to the exemption. the circular is binding on all revenue authorities.7. in view of what is stated above, we allow the appeals in respect of rco/lshs used in the manufacture of electricity which in turn was used in the refinery. the exemption shall not be available in respect of rco/l3hs used in the manufacture of electricity which was disposed of, otherwise than use in the refinery. the appellant shall be liable to pay duty on the rco/lshs used in the manufacture of electricity so disposed of.

Judgment:
1. These appeals of Indian Oil Corporation raise a common issue i.e whether Reduced Crude Oil (R.C.O) Low Sulphur Heavy Stock (LSHS) captively consumed by the appellant were eligible for exemption from Central Excise duty. Acordingly, all the appeals are disposed of by this common order.

2. The appellants are engaged in the refining of Crude petroleum which leads to the manufacture of various petroleum products. They produced RCO/LSHS, which are residual fuel oils, and used by them captively in the generation of electricity, which electricity in turn was used in the refinery for refining crude petroleum. The appellants claimed exemption for RCO/LSHS which had been captively consumed based on exemption notifications issued from time to time (Notification Nos.

352/77 dated 16.12.77 No. 75/84, No. 67/95 and 8/96 etc.). However, impugned orders held that the exemption was not available on the ground that the exemption is available only to RCO/LSHS directly used in the oil refinery and not to RCO/LSHS used in the manufacture of electricity which is not liable to Central Excise duty, the fact that electricity produced from RCO/LSHS is also used in petroleum refining notwithstanding.

3. The appellant's contention is that these are cases of indirect use of the specified exempted material and the fact that use is indirect is no ground for denial of the exemption. During the hearing of the appeals, learned Counsel for the appellants pointed out that the issue is well settled that the emergence of an intermediate product and the indirect nature of the use are no ground for denial of exemption to specified inputs. He cited the decision of the Southern Bench of the CEGAT in the case of Hindustan Petroleum Corporation Ltd. v. CCE, Hyderabad 2000 (124) ELT 323 and points that in regard to use of Naptha in identical manner, the Tribunal had held that indirect use, namely, production of electricity/steam which is used in manufacturing process, would also satisfy the requirement for use of a material in or in relation to the manufacture of final products. Learned Counsel also submitted that the objection regarding indirect use cannot have any acceptance in view of Supreme Court's decision in case of Jaypee Rewa Cement v. Commissioner of Central Excise . The learned Counsel pointed out that in regard to dispute relating to eligibility of inputs to modvat credit the Apex Court had ruled that there could be no manner of doubt that even in respect of indirect use of specified inputs credit manufacture would be allowed credit on the duty paid in respect of the inputs. Learned Counsel elaborated that in the Jaypee Rewa Cement case, the Apex Court was dealing with the question of eligibility of explosives used in mining and held that the explosives used in the mining of lime stone which go into the production of cement was also used in the manufacture of cement. Learned Counsel also referred to the decision of the Larger Bench of this Tribunal in the case of Ballarpur Industries Ltd., on the question of modvat credit on fuel oils such a LSHS captively consumed in the generation of electricity and held that indirect use of inputs such as use in electricity generation is also specified use. The learned Counsel also pointed out that this position has been accepted in the appellant's own case by the Commissioner of Central Excise, Patna in regard to use of LSHS in the appellant's units at Barauni Refinery (Order in Original No. 01-02/MP/Com/2001 dt. 29.6.2001), relying on the decision of the Tribunal in the case of Hindustan Petroleum Corporation Limited.

4. The learned Counsel for the appellants also pointed out that the impugned orders are contrary to Board's Circular issued in the context of Notification No. 352/77 and cannot be sustained for that reason alone. He pointed out that the Board had specifically clarified in its F. No. 89/13/82-CX-3 dated 6.7.83 that generation of electrical energy as an intermediate product is incidental to the process of manufacture of petroleum products and exemption contained in the Notification No.352/77-CE dated 16.2.77 asmended Notifications No. 131/80-CE dated 23.8.80, 41/82-CE dated 28.8.82 would be available.

5. We have perused the records and have heard the learned Counsel representing the Central Government also. We find that the issue raised in these appeals is covered by the decision of this Tribunal in the case of Hindustan Petroleum Corporation Ltd. and the circular of the Board. We read the circular: Elegibility of concession under Notification Nos. 74/63-CE, dated 18.5.63 & 353/77-CE, dt. 16.12.77.

In supersession of the Board's instructions contained in F. No. 35-65-CX-3 dt. 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 petroleum products falling under T.I. Nos. 6 to 11AA the exemption contained in the Notification No. 352/77-CE dt. 16.2.77 as amended by Notification Nos. 131/80-CE dt. 23.8.80 and 41/82-CE 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.

6. The crux of the dispute is whether indirect use of an exempted material would also satisfy the requirement or use of the exempted product for a particular purpose. The Supreme Court's judgment in the case of Mis. Jaypee Rewa Cement case, even though rendered in the context of modvat scheme, contains authentic pronouncement of law on the subject. The Apex Court held that there could be no manner of doubt that the use of inputs in the manufacture of intermediate products which is used in the manufacture of the final product satisfies the requirement of use in the manufacture of final products. Thus, the issue regarding indirect use remains settled in favour of the appellants. Board's circular dated 6.7.83 also clarifies that the manufacture of electricity at the intermediate stage is only incidental and does not affect the eligibility to the exemption. The circular is binding on all revenue authorities.

7. In view of what is stated above, we allow the appeals in respect of RCO/LSHS used in the manufacture of electricity which in turn was used in the refinery. The exemption shall not be available in respect of RCO/L3HS used in the manufacture of electricity which was disposed of, otherwise than use in the refinery. The appellant shall be liable to pay duty on the RCO/LSHS used in the manufacture of electricity so disposed of.