SUPREME COURT HOLDS ACTUAL USE, NOT INTENDED USE, DETERMINES ELIGIBILITY FOR NAPHTHA EXCISE EXEMPTION:

The Supreme Court has clarified that although exemption notifications may permit duty-free procurement of inputs based on their declared “intended use,” the ultimate entitlement to such exemption must be determined by examining the “actual use” of the goods. In doing so, the Court set aside the orders of the adjudicating authority and the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), ruling in favour of the assessee. The Court also addressed the issue of limitation, holding that the extended period of five years under the proviso to Section 11A of the Central Excise Act, 1944 can be invoked only in cases involving fraud, suppression of facts, or intent to evade duty, and not in cases of mere non-compliance or interpretational disputes.

The case arose from appeals filed by M/s Rashtriya Chemicals and Fertilizers Limited, a public sector undertaking engaged in the manufacture of fertilizers and ammonia. The dispute concerned Naphtha procured without payment of duty under exemption notifications. The department alleged that although the Naphtha was procured for fertilizer manufacturing, it was used along with natural gas in a common boiler to generate steam, which was further utilized not only in fertilizer and ammonia production but also in electricity generation and other units such as chemical and heavy water plants. On this basis, the department denied exemption proportionately and raised a substantial demand of duty, interest, and penalty by invoking the extended limitation period.

The adjudicating authority upheld the department’s position, concluding that partial use of Naphtha for non-fertilizer purposes disentitled the assessee from full exemption. This finding was largely affirmed by the CESTAT. Before the Supreme Court, however, the appellant contended that the exemption notifications required only proof of intended use at the time of procurement, and that the Naphtha was indeed used as fuel in an integrated manufacturing process. It was argued that due to the nature of the plant and the use of common utilities, it was not feasible to segregate the precise end-use of each input, and there was no deliberate diversion for ineligible purposes.

The Court examined the statutory framework, including the Central Excise Act, exemption notifications, and the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001. It noted that while intended use governs the stage of procurement, actual use becomes decisive in determining eligibility for exemption. At the same time, the Court acknowledged that in complex, integrated industrial processes, strict segregation of inputs may not always be feasible. In the present case, it found that the Naphtha was predominantly used in the manufacture of fertilizer and ammonia, and that incidental use for electricity generation, which itself largely supported the manufacturing process, did not justify denial of the exemption. The demand raised by the department was based largely on estimated apportionment rather than concrete evidence of diversion.

On the issue of limitation, the Court drew a clear distinction between deliberate acts such as fraud, collusion, or suppression of facts, and mere statutory non-compliance. It held that only the former category would justify invocation of the extended limitation period. In the present case, the assessee had consistently disclosed all relevant particulars to the authorities, based on which the necessary certificates were issued for availing exemption. The dispute, therefore, was purely interpretational in nature and did not involve any intent to evade duty.

The Court also noted that the appellant, being a public sector undertaking, operated in a revenue-neutral context, as any excise duty payable would ultimately be reimbursed by the government through subsidies. This further weakened the allegation of intent to evade duty. In light of these findings, the Court concluded that the denial of exemption and invocation of the extended limitation period were unjustified, and accordingly allowed the appeals in favour of the assessee.