Holding

The emergence of ethane and methane as inevitable by‑products does not preclude the exemption of ethylene and propylene under Notification No.217/86 CE, and the Tribunal's order is affirmed.

Summary

The Commissioner of Central Excise, Mumbai appealed against the Customs, Excise & Gold (Control) Appellate Tribunal’s order granting exemption to M/s National Organic Chemical Industries Ltd. for excise duty on ethylene and propylene used as captive refrigerants in its naphtha‑cracking plant. The issue was whether the exemption under Notification No.217/86 CE, which applies to inputs used in the manufacture of goods falling under Chapter 29, could be denied because the same inputs were also used in the production of by‑products ethane and methane (Chapter 27). The Tribunal held that the inevitable emergence of ethane and methane is a natural consequence of the cracking process and does not defeat the exemption, as the same quantity of ethylene and propylene is simultaneously used to produce ethylene and propylene themselves. The Supreme Court affirmed this view, stating that the notification’s language must be given a liberal construction and that ambiguity does not favour the revenue in these facts. Consequently, the appeal was dismissed and the Tribunal’s order left undisturbed.

Issues considered

Whether ethylene and propylene captively consumed as refrigerants, which also facilitate the manufacture of by‑products ethane and methane (Chapter 27), are eligible for exemption under Notification No.217/86 CE.
Whether the emergence of ethane and methane as inevitable by‑products defeats the exemption under the notification.
Whether any ambiguity in the notification should be resolved in favour of the revenue.

Legislation cited

Central Excise Tariff Act, 1985

Subjects

central exciseexemption notificationethylenepropylenecaptive consumptionby‑productschapter 27chapter 29tax exemptionambiguityrevenue

Judgment

[2008] 15 S.C.R. 499

COMMISSIONER OF CENTRAL EXCISE, MUMBAI A
' ..,.. v.
MIS. NATIONAL ORGANIC CHEMICAL INDUSTRIES
LIMITED
(Civil Appeal No. 1130 of 2003)
• B
NOVEMBER 6, 2008
[DALVEER BHANO!\RI AND HARJIT SINGH BEDI, JJ.]
,f·
Central Excise Tariff Act, 1985 - Chapter 27 & 29 -
Notification no.217186 CE dt 02.04.1986 - Ethylene and 0
propylene - Exemption under Notification - Benefit of -
Ethylene and propylene manufactured by cracking of naphtha
- Emergence of ethane and methane - Inputs (Ethylene and
· propylene) captively consumed and used as refrigerant in the
factory in further manufacture of same goods - Denial of b
exemption by Excise Department on the ground of production
of ethane and methane as by-product in process of
manufacturing ...,. Benefit of exemption allowed by tribunal -
Interference with - Held: Not called for - Ethylene and
propylene could not be manufactured without manufacturing E
its by-products ethane and methane - Emergence of ethane '
and methane was inevitable and automatic.

Respondent-assessee is engaged in the
manufacturing of ethylene and propylene by cracking ·
raw naphtha in a naphtha cracker. During the process of F
cracking raw naptha, gases such as methane and ethane.
automatically emerge as by-products. Ethylene and
propylene fall under chapter 29 and methane and ethane
fall under chapter 27 of the Central Excise Tariff Act, 1985.
A part of the ethylene and propylene manufactured by the G
said process is captively consumed by using the same

- ~
as a refrigerant in the process of separation. Th~
remaining quantity of ethylene and propylene is sold as
the final product. The respondent never informed the
499 . H
500 SUPREME COURT REPORTS (2008] 15 S.C.R.
~
,.
A Authoritie$ about the manufacture of the products falling
under chapter 27. Appellant issued notices to the -(
r
respondent demanding excise duty for the inputs
ethylene and propylene used in the manufacture of
. finished products falling under chapter 27. It was
B appellant's case that as per Exemption Notification
No.217/86 CE dated 2.4.1986, the inputs ethylene and
propylene (falling under chapter 29) captively consumed
in the manufacture of finished goods falling under
chapter 29 are exempted from excise duty. Such -t.
c exemption was not available to ethylene and propylene
used in the manufacture of goods falling under chapter
27, namely methane and ethane. The Commissioner of
Central Excise upheld the demand of duty and imposed
penalty along with interest for delayed payment of duty.
Aggrieved, respondent filed appeal which was allowed.
D
Hence the present appeal.

Dismissing the appeal, the Court 'f

HELD: 1.1. The Tribunal's finding that the ethylene
E and propylene used as refrigerant has been used in or
·in relation to the manufacture of the same goods. The
inevitable arid automatic emergence of ethane and
methane, therefore, by itself is no ground for denying the
exemption contained in the notification. The Tribunal
F came to the categoric finding that the respondent could
not have manufactured ethylene and propylene without r-
manufacturing its by-products ethane and methane. The
Tribunal held that in any technology the emergence of
ethane and m~thane was inevitable and hence while it is
no doubt correct to say that the ethylene and propylene
G have been used in or in relation to the manufacture of
ethane and methane, the identical quantity. of the same
.' ~ ... '
goods has simultane~usly been used in the manufacture ..
of ethylene and propylene. The emergence of ethane and -./
methane, therefore, cannot be a ground to deny the
H r;
;..
.,,
COMMNR. OF CENTRAL EXCISE, MUMBAI v. NATIONAL 501
ORGANIC CHEMICAL INDUS.

benefit of exemption to the respondent. Thus, no A
interference is called for in the well-reasoned judgment/
order of the Tribunal. [Paras 30 and 31] (511-F-H; 512-A,
B]

Commissioner of Central Excise, Chandigarh-I v. 8
Mahaan Diaries, (2004) 11 SCC 798; Commissioner of
Central Excise, Trichy v. Rukmani Pakkwell Traders, (2004)
11 SCC 801; Union of India and Ors. v. Tata Iron and Steel
Company Limited, (1977) 1 ELT 61; Indian Farmers Fertiliser
Cooperative Limited v. Commissioner of Central Excise, C
Ahmedabad, ·(1996) 86 EL T 177; Indian Petrochemicals
Corporation Ltd. v. Collector of Central Excise, Vadodara,
(1997) 92 ELT 294; National Organic Chemical Industries Ltd.
v. Collector of Central Excise, Bombay, (1997) 89 ELT 643;
Doypack Systems (Pvt.) Ltd. v. Union of India, (1988) 36 ELT
201 and Commissioner of Central Excise, Coimbatore v. D
Jawahar Mills Ltd. (2001) (132) ELT 3, referred to.

1.2. The proposition of law is that in case of ambiguity
the benefit of doubt must go to Revenue is correct but
has no application to the facts of the instant case. [Para E
20] [508-C]

Novopan India Ltd., Hyderabad v. Collector of Central
Excise and Customs, Hyderabad, (1994) Supp 3 SCC 606
referred to.
F
Case Law Reference:

1994 Supp (3) SCC 606 Referred to. Para 20
2004 (11) sec 798 Referred to. Para 21
G
2004 (11) sec 801 Referred to. Para 22

\ ,, 1977 (1) ELT 61
1996 (86) ELT 177
Referred to.
Referred to.
Para 24
Para 25
1997 (92) ELT 294 Referred to. Para 26 H
502 SUPREME COURT REPORTS [2008j 15 S.C.R. .
'

A 1997 (89) ELT 643 Referred to. Para 27
1988 (36) ELT 201 Referred to. Para 28
2001 (132) ELT 3 Referred to. .Para 29
B CIVIL APPELLATE JURISDICTION : Civil Appeal No.1130
of 2003.

From the final Judgment and Order dated 20.05.2002 of
the Customs Excise and Gold (Control) Appellate Tribunal, -\ ...,_
I
'vVest Zonal Bench at Mumbai passed in Final Order No. C-11/ I
C 1570/WZB/2002 in Appeal No. E/2354/96-BOM.

K. Radhakrishnan, Asha G. Nair and P. Parmeswaran for
the Appellant.

D.B. Shroff, Faranaaz Karabhari, Kanika .Gamber and
0
Rajan Narain for the Respondent.

The Judgment of the Court was delivered by

DALVEER BHANDARI, J. 1. This appeal is directed
E against the judgment and order dated 20th May, 2002 passed
by the Customs Excise & Gold (Control) Appellate Tribunal,
West Zonal Bench at Mumbai vlde Order No.Cll/1570/WZB/
2002 in Appeal No.E-2354/96 Bombay.

2. The short question for consideration in this appeal is
F whether ethylene and propylene manufactured by the
respondent assessee and used in its factory in the further
manufacture of the same goods would be entitled to the benefit
of exemption contained in notification no.217/86.

G 3. The respondent assessee M/s National Organic
Chemical Industries Limited manufactured ethylene and
propylene by cracking raw naphtha in a naphtha cracker.
Ethylene and propylene fall under chapter 29 of the Central t '
Excise TariffAct,'1985 (hereinafter referred to as "the Tariff Act").
H During the process of cracking raw naphtha; gases such as
COMMNR. OF CENTRAL EXCISE, MUMBAI v. NATIONAL 503
ORGANIC CHEMICAL INDUS. [DALVEER BHANDARI, J.]

·~
methane and ethane automatically emerge as by-products and A
is an inevitable consequence of cracking of raw naphtha.
Methane and the ethane fall under chapter 27 of the Tariff Act.

4. It is the common case of the parties that a part of the
ethylene and propylene manufactured by the aforesaid process
B
is captively consumed by using the same as a refrigerant in the
process of separation and to provide external treatment to keep
some of the products at low-temperature to prevent their
,. /- polymerization. The remaining quantity of ethylene and
propylene is sold as the final product.
c
5. The case of the appellant as set out in appeal is as
follows:

The responpent assessee holds Central Excise
Registration for manufacture of excisable goods falling under
D
chapter Nos. 27, 28, 29, 32, 38, 39 and 40 of the Schedule
to the Ta riff Act.
"'
6. The respondent manufactures petrochemicals falling
under chapters 27 and 29 from raw naptha. Raw Naptha is
cracked in cracker containing number of burners and heated E
upto 800 degree centigrade. After the process of cracking,
Ethylene and Propylene gases are produced in the factory.
These gases are also captively consumed as a refrigerant for
cooling since they have the property of reducing temperatures
upto 100 degree c. and 30 degree c. respectively. F
· 7. The captively consumed ethylene and propylene are
further used in refrigeration to manufacture products falling
under chapters 27 and 29. The methane and ethane
manufactured in this process fall under chapter 27. Ethylene and
G
propylene fall under chapter 29. The manufacture of the
products falling under chapter 27 has never been informed to
~ the authorities through the classification list filed by the
assessee.

8. It is the further case of the appellant that as per H
504 SUPREME COURT REPORTS [2008] 15 S.C.R.
',

A Exemption Notification No.217/86 CE dated 2.4.1986, the
inputs ethylene and propylene (falling under chapter 29)
•
captively consumed in the manufacture of finished goods falling I
under chapter 29 are exempted from excise duty. As per the ~

said notification such exemption will not be available to
B ethylene and propylene used in the manufacture of goods falling
under chapter 27, namely methane and ethane. In other words, ,
excise duty will have to be paid by the respondent assessee
for such of the_ quantity of ethylene and propylene (inputs) -\_,,
captively consumed and used in the manufacture of products
falling under chapter 27 namely methane and ethane.
c
9. In the circumstances, five show-cause notices were
issued to the respondent assessee demanding central excise
duty for the inputs ethylene and propylene used in the
manufacture of finished products falling under chapter 27. The
D extended period of limitation was also invoked. Penalty was
also propo$ed. r
10. Following five show.,cause notices were issued to the
respondent. .
E S.No. Date Period

1 03.02.1993 July 1992 to December, 1992

2 04.06.1993 May 1988 to June 1992
F
3 02.08.1993 January 1993 to May 1993

4 28.12.1993 June 1993 to November 1993

5 29.06.1994 December 1993 to February 1994
G

11. By order in original dated 12.7.1996, the
Commissioner Central Excise, Mumbai-Ill confirmed the d\,Jty
demands, imposed penalty and ordered interest for delayed
H payment of duty but did not order confiscation of land, building,
COMMNR. OF CENTRAL EXCISE, MUMBAI v. NATIONAL 505
.ORGANIC CHEMICAL INDUS. [DALVEER BHANDARI, J.]
,,_.
plant, machinery, etc. of the assessee. A

12. The appeal filed by the assessee before the Tribunal
was allowed by setting aside the order of the Commissioner
through the impugned order dated 20.5.2002.

13. Aggrieved by the impugned order rendered by the B
Tribunal, the Revenue is in appeal before this Court.
,, t 14. According to the appellant, the assessee is not entitled
to get the benefit of the exemption notification if the inputs
manufactured in the factory are captively used for the c
manufacture of final products not specified in column 3 of the
Table annexed to the notification. Chapter heading 27 is not
available in column 3 of the Table. The methane and ethane,
the finished products manufactured by using ethylene and
propylene as refrigerant fall under chapter 27. Hence, as per D
_,. the notification the ethylene and propylene (inputs) used for the
~ manufacture of goods falling under chapter 27 are not entitled
to get exemption from duty as per the notification.

15. In the order in original there is specific finding that
ethylene and propylene are used in the manufacture of goods E
falling under chapter 27.

16. It was contended by the respondent that ethylene and
propylene were used as refrigerant to cool hydrocarbon gases,
·-4
which result from the cracking of naphtha. It is as a result of this F
cracking that ethylene, propylene along with ethane, methane
and other substances emerge. The emergence of ethane and
methane is inevitable. Since it only emerges in the manufacture
of other substances, which are specified in column no.3 of the
table, their emergence (ethane and methane) should not by G
itself justify denial of the benefit.

1'" 17. The respondent has submitted a chart indicating the
process of manufacturing of ethylene and propylene. The chart
also reveals how ethane and methane emerge as by-products.
The chart is reproduced as under: H
01
OLEFINS PLANT - OVERALL PROCESS FLOW DIAGRAM 0
O>
LFG - 91

RAWNAFT
FURNACES
CRACKED
GAS )
IPPJMARY II
FRACTION- - ?
COMPRESSION'
&
COLD
- - - 7 HYDROGEN
I
- - - 7 METHANE(27)
-7 SECTION - - - 7 ETHYLENE
- - - 7 ETHANE(27)
U>
c
ATION HOT COLUMNS -0
---7· PROPYLENE ;o
m
s:
I l
STEAM FUEL
l
CBFS 130
l l
C2 REF C3 REF
m
0
0
GAS (27) c
;o
-I
;o
BUTADIENE .-----~
BENZENE (29) m
C4 CG ~
-0
(29) 0
~ BUTADIENE BENZENE ;o
PLANT PLANT TOLUOLE (27) -I
U>
~
~
RLHG
(27)
PROCESSING 'N
0
0
Cu RAFFINATE ~
CBFS 110 I CBFS 80 (27t -"
(27) -¥ (27) U1

Cs LHC FUEL U>
(27) (27) LHC 0
;o

·..f. "t .,, J-.
;. J.
., ' ~ ... ~
COMMNR. OF CENTRAL EXCISE, MUMBAI v. NATIONAL 507
ORGANIC CHEMICAL INDUS. [DALVEER BHANDARI, J.]

A
MASS BALANCE-COLD SECTION

~ LFG91 140 KG/HR (Ch. 28)
FEED - METHANE· 5701 KG/HR (Ch. 27) I
COLD
21797 KF/HR SECTION - ETHYLENE 9025 KG/HR (Ch. 29) B
-ETHANE 1516 KG/HR (Ch. 27),
-PROPYLENE 5415 KG/HR (Ch. 29)

I I
c2 REF
CLOSED
CIRCULATION
c3 REF
CLOSED
CIRCULATION
c

D
18. The process of manufacture indicated in the chart ,
indicates that some gases automatically emerge in the process
of cracking of naphtha, including ethane and methane. The
respondent further submitted that part of ethylene and propylene
manufactured by it is captively consumed or used in or in · E
relation to the manufacture of the same goods. The emergence
of ethane and methane, therefore, by itself is not a ground for
denying the exemption contained in the notification.

19. The respondent assessee submitted that there was no .
way by which the respondent could have manufactured ethylene F
and propylene without producing ethane and methane. It is not
as if by using a smaller quantity of raw material or other goods
involved in the process, the respondent could have averted the
emergence of ethane and methane. In other words, in the
technology utilized for the manufacture of ethylene and G
propylene, the emergence of ethane and methane was
inevitable. Hence, while it is no doubt correct to say that the
ethylene and propylene have been used in or in relation to the
manufacture of ethane ·and methane, the identical quantity of
the same goods has simultaneously been used in the H
508 SUPREME COURT REPORTS [2008] 15 S.C.R.

A manufacture of ethylene and propylene. The emergence of
ethane and methane is, therefore, by itself is not a ground to
deny the benefit of the exemption notification.

20. Mr. K. Radhakrishnan, learned senior advocate
appearing for the appellant in support of his submission placed
8
reliance on the case of Novopan India Ltd., Hyderabad v.
Collector of Central Excise and Customs, Hyderabad, ( 1994)
Supp 3 sec 606 and submitted that in case of ambiguity the ___.,,
benefit of doubt must go the Revenue. As far as this proposition
of law is concerned there is no quarrel, but it has no application
C to the facts of this case.

21. Reliance has also been placed by Mr. Radhakrishnan
on the case of Commissioner of Central Excise, Chandigarh-
! v. Mahaan Diaries (2004) 11 SCC 798. In this case, the Court
D held that in order to claim benefit of a notification, a party must
strictly comply with the terms of the notification. If on wording r-
ot the notification the benefit is not available then by stretching t·
the words of the notification or by adding words to the
notification benefit cannot be conferred.
E
22. Reliance was also placed on the case of
Commissioner of Central Excise, Trichy v. Rukmani Pakkwefl
Traders, (2004) 11 SCC 801. The same principle has been
reiterated in this case and the court held that exemption
notifications have to be strictly construed. They must be
F interpreted on their own wording. To be entitled to the benefits
of a notification, a person has to strictly comply with the
conditions of that notification. If on a plain reading of the
notification the benefit is not available then merely on the basis
of principles applied in infringement cases benefit cannot be
G claimed.

23. Mr. D.B. Shroff, learned senior counsel appearing for
the respondent submitted that he is not questioning the well-
settled proposition of law, but the respondent assessee in this
H case is entitled to the benefits of the notification on a plain
COMMNR. OF CENTRAL EXCISE, MUMBAI v. NATIONAL 509
ORGANIC CHEMICAL INDUS. [DALVEER BHANDARI, J.]

reading of the notification. A
24. Mr. Shroff further placed reliance on the following
decisions:

In Union of India & Others v. Tata Iron & Steel Company
Limited, 1977 (1) ELT 61, a four.:Judge bench of this Court held 8
as under:

"23 ... The High Court rightly said that the Notification does
not say that exemption is granted only when duty paid pig
iron is used and that the exemption would not be available C
if duty-paid pig iron is mixed with other non-duty paid
materials. If the intention of the Government were to
exclude the exemption to duty-paid pig iron when mixed
with other materials then the notification would have used
the expression "only" or "exclusively" or "entirely" in regard D
to duty-paid pig iron. The object of the notification was to
grant relief by exempting the duty-paid pig iron."

25. In Indian Farmers Fertiliser Cooperative Limited v.
Commissioner of Central Excise, Ahmedabad, 1996 (86) ELT
177, this Court observed as under: E

"7 ... The Exemption Notification does not require that the
ammonia should be used directly in the manufacture of
fertilisers. It requires only that the ammonia should be used
in the manufacture of fertilisers. The Exemption Notification F
must be so construed as to give due weight to the liberal
language it uses. The ammonia used in the water
treatment, steam generation and inert gas generation
plants, which are a necessary part of the process of
manufacturing urea, must, therefore, be held to be used G ,
in the manufacture of ammonia and the raw naphtha used
for the manufacture thereof is entitled to the duty
exemption."

26. Mr. Shroff also placed reliance on Indian
H
510 SUPREME COURT REPORTS [2008] 15 S.C.R.
' .
..
A Petrochemicals Corporation Ltd. v. Collector of Central ~
Excise, Vadodara 1997 (92) EL T 294. In this case, this Court
observed as under:

"19. Under this notification pyrolysis gasolene which falls
under chapter 27 is produced in the appellant's factory and
B
it is utilised for the manufacture of goods. As such it would
be exempt from the whole of the duty of excise leviable
thereon assuming that any duty of excise is leviable on it.
Therefore, we fail to see how any duty of excise can be
levied on any part of pyrolysis gasolene manufactured in
c the factory of the appellant.

20. Pyrolysis Gasolene being an intermediate product
which is produced in the factory of the appellant, and it
being utilised for the manufacture of other goods, it would
D be totally exempt from payment of excise duty under the
second exemption notification."

27. In National Organic Chemical Industries Ltd. v.
Collector of Central Excise, Bombay 1997 (89) ELT 643, this
E Court observed as under:

"11. Crude petroleum is refined to produce raw naphtha.
Raw naphtha is further refined, or cracked, to produce the
said products. This is not controverted. It seems to us to
make no difference that the appellants buy the raw naphtha
F from others. The question is to be judged regardless of
this, and the question is whether the intervention of the raw
naphtha would justify the finding that the said products are
not "derived from refining of crude petroleum". The refining
of crude petroleum produces various products at different
G stages. Raw naphtha is one such state. The further
refining, or cracking, of raw naphtha results in the said
products. The source of the said products is crude
petroleum. The said products must, therefore, be held to
have been derived from crude petroleum."
H
(

' COMMNR. OF CENTRAL EXCISE, MUMBAI v. NATIONAL 511
ORGANIC CHEMICAL INDUS. [DALVEER BHANDARI, J.]

28. In Doypack Systems (Pvt.) Ltd. v. Union of India 1988 A
(36) ELT 201, this Court had an occasion to E!xamine the
expressions "pertaining to", "in relation to" and "arising out of'
and observed as under:

"46 ..... The expressions "pertaining to", "in relation to" and
B
"arising out of', used in the deeming provision, are used
in the expansive sense, as per decisions of courts,
meanings found in standard dictionaries, and the principles
)
,.> of broad and liberal interpretation in consonance with
Article 39(b) and (c) of the Constitution."
c
29. Mr. Shroff further placed reliance on Commissioner of '

Central Excise, Coimbatore v. Jawahar Mills Ltd. 2001 (132)
ELT 3 wherein this Court whilst interpreting the words "used in
the factory of manufacture" used in ·clause (c) of the Explanation
to Rule 57 Q (1) held that the goods need not be used for D
'( producing the final product or used in the process of any goods
• for the manufacture of final product or used for bringing about
any change in any substance for the manufacture of final
product and the only requirement is that the same should be
used in the factory of the manufacturer. Thus, it can be seen E
that the language used in the explanation is very liberal.

30. We have heard the learned counsel for the parties at
length and perused the judgments cited at the Bar. The
Tribunal's finding that the ethylene and propylene used as
refrigerant has been used in or in relation to the manufacture F
of the same goods. The inevitable and automatic emergence
of ethane and methane, therefore, by itself is no ground for
denying the exemption contained in the notification. The
Tribunal came to the categoric finding that the respondent could
not have manufactured ethylene and propylene without cs
manufacturing its by-products ethane and methane. The Tribunal
..,.. held that in any technology the emergence of ethane and
methane was inevitable and hence while it is no doubt correct
-r--'
to say that the ethylene and propylene have been used in or in
relation to the manufacture of ethane and methane, the identical H

~
512 SUPREME COURT REPORTS [2008) 15 S.C.R.

A quantity of the same goods has simultaneously .been used'·in
the manufacture of ethylene and propylene. The emergenceoof
ethane and methane, therefore, cannot be a ground to deny the
benefit of exemption to the respondent.

31. In our considered view, no interference is called for in
8
the well-reasoned judgment/order of the Tribunal. The appeal
being devoid of any merit is accordingly dismissed. However,
in view of the facts & circumstances of the case, the parties
are directed to bear their own costs.

N.J. Appeal dismissed.