TMI Blog2000 (1) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1985 with effect from 1-3-1994. The said order also deals with exemption claimed for Naphtha removed for flushing the pipelines and for which duty exemption was claimed under the same Notification. 3.The Order-in-Appeal No. 47/95 impugned deals with the classification dispute i.e. availability or otherwise of the duty exemption noted above, while the Orders-in-Appeal Nos. 6/98, 7/98 and 8/98 deal with the demands quantified in terms of the Order-in-Appeal No. 47/95 and a number of show-cause notices issued quantifying the same. In the Order-in-Appeal No. 47/95, the appellants claim for exemption for LSHS, Fuel Oil and Refinery Gases which were captively consumed to first produce steam, which in turn was used in the manufacture of the petroleum products falling under Chapter 27 was allowed. Further, the appellants claim for exemption on naphtha captively consumed for producing electricity which in turn was used in the manufacture of the final products was disallowed as also the use thereof for flushing. Therefore, the Orders-in-Appeal Nos. 6/98, 7/98 and 8/98 deal with the quantified duty demands flowing out of the earlier Order-in-Appeal No. 47/95 and the demand for duty of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpreted liberally and in a manner which should include in consideration with respect to any intermediate product arising during the course of such manufacture of the final products. Applying this to the facts of the case, he explained that Naphtha qualifies for the said exemption as an input as it falls under Chapter 27 of the Tariff and the said Chapter 27 is mentioned in Column 2 of the said table. Similarly, when this Naphtha was used captively, first electricity was generated by the hot gases produced on burning it; thereafter in a continuous process the said hot gases were used to drive the turbines which produce electricity. This electricity was, in turn, used for the manufacture of the final products, which admittedly were falling under Chapter 27 of the said Tariff. Since the column No. 3 of the said exemption Notification specifies final products to be those, inter alia, as also falling under Chapter 27, therefore, both the requirements contained in the said table namely the input and the final products was met in this case. He submits that the Naphtha so used was used in the manufacture of the final products and the electricity generated was merely an intermediate pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly apply to the facts of the present case. The Learned Sr. Advocate submitted that a similar approach was adopted by the Hon'ble Apex Court in their decision in the case of Gujarat State Fertilizers Co. v. CCE as reported in (1997) 4 SCC 140, when they considered the use of ammonia as an intermediate product in the manufacture of molten urea (fertilizers) from raw naphtha. The learned Sr. Advocate also relied on the decision of this Tribunal in the case of Associated Cement Companies Ltd. v. CCE as reported in 1999 (108) E.L.T. 477(T), wherein the Tribunal had considered the question of availability of the Modvat credit under Rule 57A on Sulphuric acid etc. which was used to generate electricity which in turn was used for the manufacture of final product. He submits that though admittedly rule 57A dealt with eligibility to the Modvat credit but the principle therein was the same as Modvat credit was only available to those inputs which were used in or in relation to the manufacture of the final products. The only difference was that in that case the relief was in terms of the Modvat credit whereas in the present Notification the relief was in terms of duty exemption. Therefore, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both in the body of the exemption Notifications in question as well as in column 3 of the table appended thereto and the word "output". He submitted that the Government had used the word "final products" and not "output" because it was the intention of the Government to link "inputs" specified with the "final products" and not any output appearing at any intermediate stage. This interpretation of the said Notification was also in line with the ratio of the judgments cited above. 9.The learned Senior Advocate, therefore, concluded that the exemption on naphtha contained in the said Notification had been correctly claimed by the appellants and to this extent the Orders-in-Appeal needed to be set aside. 10.As far as the issue of use of raw naphtha for flushing operations in the pipelines is concerned, the learned Sr. Advocate reiterated that the same principle would apply in this case also, as flushing operations were necessary to clean the pipelines in which the crude had to be transported, as without such transportation, the manufacturing operation could not commence. In this connection, he again cited the decision of the Hon'ble Apex Court in the case of IFFCO (supra) wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thirdly, he submitted that the electricity so generated out of naphtha is not being only used for the manufacturing process but is also used for other general purposes in the refinery like lighting etc. As against this, the only use of the steam generated was for directly heating the crude etc. to facilitate the manufacture of the final products. He submits that the Orders-in-Appeal have discussed this issue in great detail and he reiterated the same. 12.With respect to the use of naphtha for flushing of pipelines, the learned D.R. emphasis that such flushing is merely to clean the pipelines. Such cleaning operations have no nexus with the manufacturing process resulting in use of inputs to manufacture the final products. These flushing operations do not lead to the emergence of any final products. 13.The learned D.R. further distinguishes the case laws cited by the Learned Sr. Advocate and submits that none of these judgments were pronounced with respect to the Notification No. 217/86, as amended and therefore, were under consideration of law and facts which were different. 14.We have carefully considered the rival submissions and records of the case including the affidavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbit of column 3 of the table appended to the said notifications. It is also not disputed that naphtha as input is falling under chapter 27 which is mentioned in column 2 of the table. Therefore, the only question before us for consideration is whether such indirect use of naphtha in the manufacturing process would qualify the said naphtha for duty exemption under this notification . In this connection, we find substantial force in the pleadings of Ld. Senior Advocate that the said notification prescribes a system wherein there is a specified input and there are specified final products. Since the notifications has not used the words "outputs" but the words "final products", therefore we find that as long as it can be demonstrated that the inputs have been used to manufacture the final products, the inputs would qualify for the said duty exemption. Therefore, we narrow down to the consideration of a position where such indirect use as is noted above, namely, production of electricity/steam which is used in the manufacturing process would also satisfy the phrase "in or in relation to the manufacture of the final products". We are inclined to hold so. This is because Revenue has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty exemption for inputs used in the manufacture of fertilizers . The molten urea was held to be such a fertilizer. In the instant case, the naphtha generates steam/electricity which is used to produce the final products. Since in both these situations, the inputs are so indirectly used, the acid test laid down by the Apex Court is not an indirect use but whether this use was essential for emergence of the final products, therefore, we find that the ratio of this decision shall also apply to the facts of the present case. We also find substantial force in Ld. Senior Advocate's reliance in this Tribunal decision in the case of Associated Cement Companies (supra). In the said order, the Tribunal had considered the words "in relation to manufacture" as had been ruled by the Hon'ble Apex Court in the case of J.K. Cotton Spinning Weaving Mill Co. Ltd. as in 1997 (91) E.L.T. 34 (SC) as well as in the case of Rajasthan State Chemicals Works as in 1991 (55) E.L.T. 444 (SC) and had held that sulphuric acid used as chemical for treating water which in turn is used essentially for generation of electricity which electricity in turn is used to produce the final goods, then the Modvat credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er prior or immediately succeeding manufacturing operations is by itself not relevant to the issue as to whether that input has been used in the manufacture of the final product as has been clearly laid down by the Hon'ble Apex Court in the case of CCE v. Rajasthan State Chemicals (supra). The acid test here is whether such use is integral to the manufacturing process. In this case, we find that unless the pipeline is flushed, the raw material (either crude or any other petroleum product) which is to be further processed cannot be transported into the plant where it is further worked upon. Therefore, we find that the flushing which enables the pipeline to become fit for such use is another process which is integrally connected with the manufacturing process of the final product and therefore for the same reasons as discussed above, this use would also qualify for duty exemption under this notification. 19.In view of the aforesaid analysis, and findings, we find full merit in these appeals and therefore we order that naphtha used for the generation of electricity/steam which in turn is captively used in the manufacture of the final products as well as naphtha used for flushing ope ..... X X X X Extracts X X X X X X X X Extracts X X X X
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