JUDGMENT:

KAPADIA, J.

The above group of Civil Appeals and cross Civil Appeals are filed by the Department and the assessee, M/s. Chennai Petroleum Corporation Ltd. respectively under Section 35L(b) of the Central Excise Act, 1944. The assessee manufactures petroleum products like naptha from crude oil since 1969. These petroleum products fall under Chapters 27, 28 and 29 of the Central Excise Tariff Act, 1985. Basically, the assessee is a refinery. It uses Refinery Fuel Oil (RFO), being the residuary left after distillation of Bombay High Crude Oil as fuel for generation of high pressure steam which in turn is used for generation of electricity for their co-generation plant in which the high pressure steam moves a turbine which generates electricity. A part of that electricity is supplied to Tamil Nadu Electricity Board and the major portion of it is captively consumed.In the present case, we are concerned with three products produced by the assessee in their refinery from the said RFO. The three products are naptha, sulphur and electricity. The assessee is a refinery. It is declared by the Central Government to be a "deemed warehouse". RFO is the material which remains in the refinery. The said RFO is not removed from the refinery. It is a residue which remains at the bottom of the columns in the refineries. It is like slurry. According to the Department, assessee had failed to declare to the Department that the said RFO was used to produce electricity. According to the Department, the assessee had failed to declare to the Department that a part of the electricity generated was sold to Tamil Nadu Electricity Board.

According to the Department, sulphur was not a petroleum product and, therefore, to the extent that the said RFO was used to produce sulphur was dutiable and not exempted. According to the Department, none of the three products, namely, naptha, sulphur and electricity were petroleum products and, therefore, the refinery was liable to pay duty. According to the Department, the refinery was a "deemed warehouse", but the above three products were not petroleum products and, therefore, the assessee was liable to pay duty.

Accordingly, demands were made on the assessee to pay arrears of duty for the period December 1993 to July 1998 and for the period August 1998 to January 1999. It may be noted that the period December 1993 to July 1998 (five years) came under show-cause notice dated 22nd December, 1998 whereas the period August 1998 to January 1999 came under show cause notice dated 17th February, 1999. Consequently, in the present case, we are required to consider whether the Department was entitled to invoke the extended period of limitation under Section 11A with show cause notice dated 22nd December, 1998. However, that question did not arise in the case of show cause notice dated 17th February, 1999 since the demand fell within the period of limitation.

Having heard learned counsel on both sides, we are in agreement with the view expressed by the Tribunal in its impugned judgment by which it has been held that naptha is a petroleum product and, therefore, the assessee which was a "deemed warehouse" was entitled to exemption in respect of RFO used for producing naptha during the above period.

Therefore, to this extent, the assessee succeeds. To this extent, the show cause notice dated 22nd December, 1998 fails.

We are also in agreement with the view taken by the Tribunal that sulphur produced on RFO is a by-product and consequently, the show cause notice dated 22nd December, 1998 demanding duty on RFO used by the assessee for the manufacture of sulphur is not sustainable. The assessee succeeds in this regard also.

However, the assessee produces electricity from RFO. That electricity is sold to Tamil Nadu Electricity Board. The major portion of the electricity produced is captively consumed. The entire generated electricity is not sold. A part of the generated electricity is sold. It was vehem