Holding

Naptha and sulphur are petroleum products and exempt; electricity is exempt only when captively consumed, and the Revenue cannot invoke Section 11‑A for the earlier period but may demand duty for electricity sold in the later period.

Summary

The Commissioner of Central Excise issued show‑cause notices to Chennai Petroleum Corporation Ltd (CPC) demanding excise duty on Refinery Fuel Oil (RFO) used to produce naptha, sulphur and electricity. CPC, a government‑owned refinery declared a "deemed warehouse", argued that naptha and sulphur are petroleum products and that electricity generated for captive use should be exempt, while only the portion sold to the Tamil Nadu Electricity Board (TNEB) could attract duty. The Court examined whether naptha and sulphur qualify as petroleum products, whether electricity sold externally is dutiable, and whether the Revenue could invoke the extended limitation period under Section 11‑A for demands covering December 1993 to July 1998. It held that naptha and sulphur are indeed petroleum products and exempt, electricity is exempt only to the extent it is captively consumed, and the Revenue’s reliance on Section 11‑A for the earlier period was barred by limitation. Consequently, the demand for duty on RFO used for naptha, sulphur and captive electricity was set aside, while the demand for duty on RFO used to generate electricity sold to TNEB for August 1998‑January 1999 was remitted for fresh calculation, and the penalty imposed was deemed unjustified.

Issues considered

Whether naptha and sulphur produced from RFO are petroleum products and thus exempt from excise duty under the deemed‑warehouse status.
Whether electricity generated from RFO and sold to the Tamil Nadu Electricity Board is liable to excise duty.
Whether the Revenue could invoke the extended period of limitation under Section 11‑A of the Central Excise Act for demands covering December 1993 to July 1998.
Whether the penalty imposed on the assessee was justified.

Legislation cited

Central Excise Act, 1944s. 11-A, s. 35L(b)
Central Excise Tariff Act, 1985

Subjects

deemed warehouserefinery fuel oilexemptionpetroleum productsnapthasulphurelectricitycaptive consumptionexcise dutylimitation periodSection 11-Ashow‑cause noticepenalty

Judgment

A COMMISSIONER OF CENTRAL EXCISE, CHENNAI-I
if(

v.
CHENNAI PETROLEUM CORPN. LTD.

APRIL 19, 2007
B
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]
-..-
Central Excise Tariff Act, I 985: .7

c Using Chapters 27, 28 and 29-0il Refinery-Declared deemed warehouse-
Refinery Fuel Oil to produce naptha, sulphur and electricity -Major
portion of electricity so generated captively consumed but a part thereof
sold-Demand of duty raised on RFD-HELD: Tribunal was right in its view
that naptha and sulphur being petroleum products a assessee was entitled
to exemption in respect of RFO used for producing these items-Similarly
D assessee was entitled to exemption as regards electricity captively consumed-
But with regard to portion of electricity sold, Revenue was right in demanding
duty on RFO for the period August 1998 to January 1999-To that extent )
adjudicating authority would determine duty amount afresh.

Central Excise Act, 1944:
E
s. I I-A-Invoking of extended period of limitation for arrears of duty-
Oil Refinery owned by Central Government-Declared deemed warehouse-
Using Refinery Fuel Oil to generate electricity a portion of which sold-
Revenue issuing show cause notices demanding arrears of duty for period
December, 1993 to July, 1998 by show cause notice dated 22.12.1998- ...
F HELD : There was no suppression on the part of assessee-Revenue was not
'Y

right in invoking extended period of limitation-Demand is beyond limitation.

Assessee, a refinery, declared by the Central Government to be a
"deemed warehouse", used Refinery Fuel Oil, i.e. the residuary left after
G distilling crude oil, in producing petroleum products, namely, naptha, sulphur
and electricity, which fell under Chapters 27, 28 and 29 of Central Excise _. .... -
Tarriff Act, 1985. The major portion of the electricity so generated was
captively consumed, and a part of it was sold to the Tamil Nadu Electricity
Board. According to the Revenue none of these products, namely, naptha,

H 322
COMMR. OF CENTRAL EXCISE, CHENNAI-1 v. CHENNAI PETROLEUM CORPN. LTD 323

sulphur and electricity were petroleum products and, therefore, the refinery A
was liable to pay duty. Accordingly, demands were raised to pay arrears of
duty for the period 1993 to July 1998 under show cause notice dated
22.12:1998 and for the period August 1998 to January 1999 under show cause
notice dated 17.7.1999. The Tribunal held partly in favour of the assessee
and partly i'n favour of the Revenue which gave rise to the present appeals
and cross appeals. B

..... Disposing of the matters, the Court
,. HELD: 1.1. The Tribunal rightly held that naptha and sulphur are
petroleum products and, therefore, the assessee which was a "deemed
warehouse" was entitled to exemption in respect ofRFO used for producing c
naptha and sulphur during the period in question. Consequently, the show
cause notice dated 22nd December, 1998 demanding duty on RFO used by the
assessee for the manufacture of naptha and sulphur is not sustainable.
[Para 4 and 5) (325-F-H)
D
1.2. As regards the electricity produced by assessee from RFO and sold
to Tamil Nadu Electricity Board, Revenue was right in demanding duty on
RFO. The very purpose behind giving the status of"deemed warehouse" to
the refinery is to provide exemption to the RFO which is used for producing
petroleum products. The Deemed Warehouse status demands nexus to the final
product cleared from it. Generation of electricity, if captively consumed, is E
exempted from duty. This is because electricity which is genemted in the
refinery is used to operate the various processes within the refinery. However,
a portion of the generated electricity, in the present case, Is sold to Tamil
Nadu Electricity Board. To that extent alone, the Department was right in
__.. .,... demanding duty on RFO. (Para 6) (326-A-D)
F
Indian Oil Corporation Ltd. v. Collector of Central Excise, Baroda,
(2006) 202 ELT 37 SC, relied on.

2.1. So far as the question of Revenue invoking the extended period of
limitation under Section llA of the Central Excise Act is concerned, the
G
assessee is a Public Sector Company owned by the Government of India. There
....' ... was no suppression on the part of the assessee and, therefore," the Department
was wrong in invoking the extended period of limitation under the show-cause
notice dated 22nd December, 1998 for the period December 1993 to July 1998.
The demand to that extend is beyond limitation. [Para-7) [326-F-G)
H
324 SUPREME COURT REPORTS (2007] 5 S.C.R.

A 2.2. The second show cause notice dated 17th February, 1999 is within '(
limitation. Assessee would be liable to payment of duty thereunder on the RFO
used for producing electricity which was sold to Tamil Nadu Electricity Board.
This will require recalculation. Accordingly, to that extent alone, the matter
is being remitted to the adjudicating authority for fresh determination of the
duty amount payable by the assessee during the period August 1998 to January
B 1999. [Para 8) [327-A-B)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 318-322 of2006. ~

,..
From the Final Order Nos. 63, 64, 65, 66 & 67 of2005 dated 07.01.2005
of the Customs, Excise & Service Tax Appellate Tribunal, South Zonal Bench,
c Chennai in Appeal Nos. E/000364/2000, E/0000786/2001, E/000787/2001, E/
001234/2001 and E/0012345/2001.

WITH

Civil Appeal Nos. 4607 & 4639 of2005.
D
V. Shekar, Navin Prakash, Tufail A. Khan, Sudhir Kr. Sajwan, Pradeep
Dubey, P. Parmeshwaran and B.K. Prasad for the Appellant.

V. Lakshmikumaran, Alok Yadav and M.P. Devanath for the Respondent.

E The Judgment of the Court was delivered by

KAPADIA, J. I. The above group of Civil Appeals and cross Civil
Appeals are filed by the Department and the assessee, Mis. Chennai Petroleum
Corporation Ltd. respectively under Section 35L(b) of the Central Excise Act,

F
1944.

2. The assessee manufactures petroleum products like naptha from
y
-
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
G
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.

H 3. In the present case, we are concerned with three products produced
COMMR. OF CENTRAL EXCISE, CHENNAl·I v. CllENNAI PETROLEUM CORPN. LTD. [KAPADIA, l.] 325

by the assessee in their refinery from the said RFO. The three products are A
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 B
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 C
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 D
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 E
of limitation under Section 11 A 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.

4. Having heard learned counsel on both sides, we are in agreement
with the view expressed by the Tribunal in its impugned judgment by which F
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.
G
5. 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. H
326 SUPREME COURT REPORTS [2007] 5 S.C.R.

A 6. 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 before
us on behalf of the assessee that the refinery was a "deemed warehouse" and
whatever is produced in the refinery from the RFO was entitled to exemption.
B It was vehemently urged that RFO is a residuary which remains at the bottom
of the columns. That RFO was never removed from the refinery. Hence, the
assessee was entitled to claim deduction for even the RFO used in generation
of electricity. We do not find merit in this argument. The assessee is a refinery. y

It is a "deemed warehouse". It is so recognised by the Central Government.
c This is not in dispute. The very purpose behind giving the status of "deemed
warehouse" to the refinery is to provide exemption to the RFO which is used
for producing petroleum products. That status is not meant for producing
products which are not petroleum products. In other words, the Deemed
Warehouse Status demands nexus to the final product cleared from it.
Generation of electricity, if captively consumed, is exempted from duty. This
D is because electricity which is generated in the refinery is used to operate the
various processes within the refinery. In the refinery, there exists large number
j
of processes. Each process generates an item and, therefore, every refinery
is given the status of"deemed warehouse". However, a portion of the generated
electricity, in the present case, is sold to Tamil Nadu Electricity Board. To that
E extent alone, the Department was right in demanding duty on RFO.
7. The question still remains as to whether the Department was right in
invoking the extended period of limitation under Section I IA of the Central
Excise Act. In this connection, we are of the view that there was no suppression
on the part of the assessee. As stated above, the assessee is a Public Sector
F Company. It is owned by the Government of India. The Department was aware
that the assessee was a refinery. Nothing prevented the Department from
visiting the site. Nothing prevented the Department from inquiring into the
process within the refinery in the matter of production of naptha, sulphur and
electricity. Generation of electricity was also used for the running of the
refinery. The electricity was supplied to Tamil Nadu Electricity Board (partly).
G In the circumstances, there was no suppression on the part of the assessee
and, therefore, we are of the view that the Department was wrong in invoking .-)

the extended period of limitation under the show-cause notice dated 22nd
December, 1998 for the period December 1993 to July 1998. The demand to
that extent is beyond limitation. The assessee succeeds in that regard.
H
COMMR. OF CENTRAL EXCISE, CHENNAl-1 v. CHENNA! PETROLEUMCORPN. LTD. [KAPADIA, J.) 327
;; 8. The second show cause notice dated 17th February, 1999 is within A
limitation. It seeks to demand duty for the period August 1998 to January 1999
on the RFO used for producing electricity. We have held that the electricity
generated from RFO which was captively consumed by the refinery was not
liable to duty. l'o that extent, the demand made in the show cause notice dated
I7t.'1 February, 1999 fails. However, as stated above, a part of the electricity
produced from RFO was sold to Tamil Nadu Electricity Board during the B
period August 1998 to January 1999. To that extent alone, the assessee would
__, be liable to payment of duty. This will require recalculation. Accordingly, to
.. ..., that extent alone, the matter is being remitted to the adjudicating authority for
fresh determination of the duty amount payable by the assessee during the
period August 1998 to January 1999. c
9. We are also of the view that the penalty imposed on the assessee
was unjustified since it has produced naptha and sulphur which are petroleum
products. Similarly, the assessee has produced electricity from RFO, the major
portfon of which has been used for captive consumption and a minor portion
is sold to Tamil Nadu Electricity Board. In the circumstances, we are of the D
view that the Department had erred in imposing penalty.
l
10. Before concluding, we may quote hereinbelow paragraph 12 and
paragraph 13 from the judgment of this Court in the case of Indian Oil
Corporation Ltd v. Collector of Central Excise, Baroda, (2006) 202 ELT 37
(SC)]: E

"12. Apart from this, considering the appeal on merits as well, we find
that the assessee would be entitled to the benefit in terms of entry
34 of exemption Notification No.75/84. The same reads as under:

-r SI. Description Rate of Intended use/ F
No. of goods duty Condition
34 Low Sulphur Nil Intended for use as
Heavy Stock fuel in a refinery
Explanation.-
"Refinery" means a refinery G
wherein refining of crude
• .... petroleum or shale or blending of
non-duty paid petroleum products
is carried on.
The Board has issued a circular which reads as under : H
328 SUPREME COLJRT REPORTS (2007] 5 S.C.R.

A Eligibility of concession under Notification Nos.74/63-C.E., dated 18- "'·-4
5-63 @ 353/77-C-E, dated 16-12-77.

In supersession of the Board's instructions contained in F.No.3565-
CX-3 dated 16-9-67 it has been decided that since generation of
electrical energy (electricity as an intermediate product is incidental
B in the process and manufacture of petroleum products falling under
T.I. Nos. 6 to I !AA the exemption contained in the Notification
No.352/77-C.E., dt. 16-12-77 as amended by Notification Nos.131/80- .,_
C.E., dt. 23-8-80 and 4 l /82-C.E., 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
c. of petroleum products which is used in the generation of electricity
which, in turn, is not used in the process and manufacture ofpetroleum
products." [emphasis supplied]

[underline by us]
D 13. Low Sulphur Heavy Stock is used by the assessee as fuel in a
Thermal Power Plant located within the refinery area for generating
electricity which in turn is captively consumed for production of
various petroleum products. Entry No.34 of Notification No.75/84 read
with the clarificatory circular clearly spells out that the assessee
E would be entitled to the benefit of exemption on LSHS to the extent
it is used in Thermal Power Plant located within the refinery area for
generating electricity which in turn is used in the process of
manufacture of petroleum products."

11. Accordingly, the above civil appeals and the cross appeals are
F disposed of with no order as to costs. ..,..

R.P. Appeals disposed of.