Commissioner of Central Excise, Chennai-I vs Chennai Petroleum Corpn. LTD.

Headnote Court Copy Facts Arguments Court observation Judicial Analysis Case Map Category Hierarchy Table of Content

2007 Supreme(SC) 539

SUPREME COURT OF INDIA
S.H. Kapadia & B. Sudershan Reddy
Commissioner of Central Excise, Chennai-I PETITIONER:
Chennai Petroleum Corpn. Ltd RESPONDENT:
Appeal (civil) 318-322 of 2006
Civil Appeal No.4607 and 4639 of 2005
Decided on 19/04/2007

Important Points

Fuel exemptions for "deemed warehouses" apply to petroleum products and captive electricity used in refinery processes, but not to electricity sold commercially. Extended limitation under Section 11A is inapplicable absent suppression, particularly for Public Sector Companies where the Department can readily verify operations.

Subject

Tax Law - Central Excise

Act Referred

CENTRAL EXCISE TARIFF ACT: Ch.29, Ch.28, Ch.27

Headnote

(A) Central Excise Act, 1944 - Sections 11A and 35L(b) - Central Excise Tariff Act, 1985 - Refinery status as ‘deemed warehouse’ - Exemption on Refinery Fuel Oil (RFO) - Manufacture of petroleum products - Naptha and sulphur held as petroleum products or by-products, thus entitled to exemption - Generation of electricity from RFO - Exemption available for captive consumption used in refinery processes, but not for electricity sold to third parties - Deemed warehouse status requires a nexus to the final product cleared from it.

(B) Limitation - Section 11A - Invocation of extended period - No suppression of facts by a Public Sector Company - Department’s failure to inquire into refinery processes does not justify invoking extended limitation - Demand is beyond limitation if no suppression is proven.

(C) Penalty - Imposition of penalty held unjustified where the products manufactured are petroleum products or electricity is primarily for captive consumption.

Facts of the case:
An assessee refinery, recognized as a "deemed warehouse", used refinery fuel oil (RFO) to produce naptha, sulphur, and electricity. While most electricity was captively consumed, a portion was sold to a state electricity board. The Department demanded arrears of duty, claiming these three products were not petroleum products and therefore the fuel used to produce them was dutiable. The Department also invoked the extended period of limitation under Section 11A for the period December 1993 to July 1998.

Findings of Court:
Naptha is a petroleum product and sulphur is a by-product; thus, the assessee is entitled to exemption for RFO used in their production. Regarding electricity, the "deemed warehouse" status is intended to provide exemption to RFO used for producing petroleum products. Captive consumption of electricity to operate refinery processes is exempted, but electricity sold to an external board is not. For the first show-cause notice, the extended period of limitation under Section 11A was wrongly invoked as there was no suppression of facts by the Public Sector Company.

Issues: Whether naptha, sulphur, and electricity produced from RFO qualify for exemption under the "deemed warehouse" status and whether the Department was entitled to invoke the extended period of limitation under Section 11A.

Ratio Decidendi: The benefit of "deemed warehouse" status depends on a nexus between the fuel used and the final petroleum product cleared. While captive electricity supports the refinery process, commercial sale of electricity breaks this nexus. Furthermore, the extended period of limitation under Section 11A cannot be applied without evidence of suppression, which cannot be inferred when the assessee is a government-owned company and the Department had access to verify site processes.

Result: Appeals and cross-appeals disposed of; matter remitted for recalculation of duty on electricity sold during the period within limitation; penalties set aside.

Legal Category Hierarchy

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 vehemently argued