Holding

Pyrolysis gasoline is an intermediate product incidental to the manufacture of scheduled chemicals and is fully exempt from excise duty; the appellant did not divert raw naphtha, so the Tribunal's order is set aside.

Summary

M/s Indian Petrochemicals Corporation Ltd. obtained raw naphtha at a concessional rate under Notification No. 27/89‑CE for manufacturing chemicals listed in the schedule. The raw naphtha was thermally cracked, producing olefinic rich gas, pyrolysis fuel oil and pyrolysis gasoline; the latter was further processed to yield benzene, toluene and, as a residue, petroleum resins which are not in the schedule. The Collector of Central Excise held that the portion of pyrolysis gasoline used for petroleum resins amounted to a diversion of raw naphtha and levied excise duty, which the Tribunal partially reduced. The Supreme Court examined the terms of the exemption notification, particularly Explanation 2, and held that the residual pyrolysis gasoline is an incidental, inevitable product and, being an intermediate used for further manufacture, is fully exempt from duty under both Notification No. 27/89‑CE and Notification No. 28/89‑CE. Consequently, the appellant did not divert raw naphtha, and the Tribunal’s order was set aside, allowing the appeal.

Issues considered

The appellant diverted raw naphtha obtained under the exemption to manufacture petroleum resins.
Whether pyrolysis gasoline, an intermediate product, is exempt from excise duty under the exemption notification.
The interpretation of Explanation 2 of Notification No. 27/89‑CE regarding incidental products.
Whether the Tribunal's assessment of duty on pyrolysis gasoline should stand.

Legislation cited

Subjects

excise dutyraw naphthaexemption notificationpyrolysis gasolineintermediate productincidental productCentral Excise Tariff Actpetroleum resins

Judgment

A M/S INDIAN PETROCHEMICALS CORPORATION LTD.
v.
COLLECTOR OF CENTRAL EXCISE, VADODARA

MARCH 5, 1997
B
[A.M. AHMADI, en. AND SU.TATA v. MANOHAR, J.]

Central Excise Tariff Act 1985-{}zaptm 27 and 29-Raw Naptha-Ex-
empted from duty-By notification for manufacturing products enumerated in
table subjected to Thennal cracking by-product Pyrolysis Gasolene-Collector
.c levied excise duty--T1ibunal held that pyrolysis Gasolcne used for manufac-
ture of Petroleum Resins not entitled for exemption-Held, raw naptha not
diverted to manufacture Petroleum Resins-Pyrolysis Gasolene intennediate
product-Totaliy exempted from payment of excise duty-Order of Tribunal
set aside.
D
The appellant was engaged in the manufacture of Ethylene,
Prophylene, Benzene, Toluene and other products falling under chapters
27 and 29 of the Central Excise Tariff Act, 1985. The raw naphtha obtained
by the appellant under the notification was exempted from payment of duty
for manufacturing products specified in the table. The raw naphtha was
E subjected to thermal cracking and one of the by products obtained was
pyrolysis gasolene. The Collector of Central Excise held that the entire
quantity of pyrolysis gasoline was not entitled to concessional rate of duty
as it was used for the manufacture of Petroleum. Resins which were not
enumerated in the said table.
F

-
On appeal, the Tribunal held that Pyrolysis Gasolene used for
manufacture of Benzene and Toluene was entitled to concessional rate of
duty but p)Tolysis Gasoline used for manufacture of Petroleum Resins was
not entitled to concessional rate. Hence the present appeal.

G The contention of the appellant was that the entire quantity of raw
naphtha obtained was subjected to fraction and other process to manufac-
ture the products. One of the by products obtained was Pyrolysis Gasolene
which was further processed to obtain Benzene and Toluene which were
products mentioned in the table. According to the appellant there was no
H violation of the terms of the notification.
718
INDIAN PETROCHEMICALS v. COLLECTOR OF CENTRAL EXCISE 719

On the other hand the respondent c11ntended that the appellant had A
diverted raw naphth~ to the manufacture of petroleum Resin and there-
fore, not entitled to concessional rates of excise duty.

Allowing the appeal, this Court

HELD : 1.1. The contention of the Collector of Central Excise that B
the appellant has diverted raw naphtha· to the manufacture of Petroleum
Resins is not correct. What the appeHant obtained under the exemption
notification was raw naphtha which was subjected to thermal cracking. The
entire quality of raw naphtha was subjected to processing for the purpose
of obtaining items .enumerated in the table. The appellant did not set apart
c
-
...,
any quantity of raw naphtha for the purpose of obtaining petroleum
Resin. It has merely subjected the residual Pyrolysis Gasolene for the
manufacture of Petroleum Resins. This residual Pyrolysis Gasolene cannot
be equated with raw naphtha which was obtained at concessional rate of
duty. (724-E-F]
D
1.2. Explanation 2 of the notification provides that in cases where
certain goods which are incidental, inevitable or involuntary to the process
of mamffacture of the products specified in the table ;tre produced in the
course of manufacture, the exemption under the notification shall. not be
denied on the ground that these goods are not products specified in the
schedule. (724-G] E

State of Haryrma v. Dalmia Dadri Cement Ltd., (1987) Supp. SCC 679
and Mis Steel Authority of India Ltd. v. Collector of Central Excise,· (C.A.
Nos. 3406-11/90 with C.A. No. 3178/90 decided on 30.7.1995 by Supreme
Court relied on.
F
2. 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 be totally exempt from payment of
Ii- excise duty under the second exemption notification. The appellant is not
liable to pay any duty of excise on Pyrolysis Gasolene. The order of the G
Tribunal is set aside. (727-8-C]
:....
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4914 of
1991.

""" From the Judgment and Order dated 19.9.92 of the Central Excise H
720 SUPREME COURT REPORTS [1997] 2 S.C.R.

A and Gold (Control) Appellant Tribunal, New Delhi in A. No. E/268/91-C.
V. Lakshmi Kumaran, A.R. Madhav Rao, M.P. Devnath and Shekhar
Vyas for P.H. Parekh for the Appellant.

R.R. Mishra, and (S.D. Sharma) for V.K. Verma, for the Respon-
B
.....
dent.

The Judgment of the Court was delivered by '

MRS. SUJATA V. MANOHAR, J. The appellant is a Government of
India Undertaking. The appellant is engaged, inter a/ia, in the manufacture
C

.
of Ethylene, Propylene, Benzene, Toluene and other products falling under
Chapters 27 and 29 of the Central Excise Tariff Act, 1985. ·

At the material time the appellant obtained raw naphtha from the
Refinery in terms of Notifi.;ation No. 27/89-C.E. dated 1.3.1989. Under this
-
notification, raw naphtha falling under sub-heading No. 2710.14 of the
D schedule to the Central Excise Tariff Act, 1985 intended for use in the
manufacture of products specified in the table annexed to the said notifica-
tion, is exempt from payment of so much of the duty of excise leviable
thereon as is in excess of the amount calculated at the rate of Rs. 60 per
kilolitre at 15C on the quantity of naphtha consumed in the manufacture
E of the said products. The table of products which is annexed to the
notification, inter alia, covers Ethyelene, Propylene, Butadiene, Benzene,
Toluene and Para-Xylene which are the products manufactured by the
appellant from raw naphtha obtained by the appellant under the conces-
sional rate of excise duty under the above notification. According to the
appellant it has not violated any term of this notification.
F
The text of the notification is as follows :

"Concessional rate on naphtha used in the manufacture of specified
chemicals. - In exercise of the powers conferred by sub-section (1)
of Section 5A of the Central Excises and Salt Act, 1944 (1 of 1944),
G the Central Government, being satisfied that it is necessary in the
public interest so to do, hereby exempts raw naphtha, falling under
sub-heading No. 2710.14 of the Schedule to the Central Excise
Tariff Act, 1985 (5 of 1986), intended for use in the manufactue
of the products specified in the Table hereto annexed from so
H much of the duty of excise leviable thereon as is in excess of the
INDIAN PETROCHEMICALS'· COLLECTOR OF CENrRAL EXCISE [MRS. SUJATA V. MANOHAR, l.J 721
.... ;

amount calculated at the rate of Rs. 60 per kilolitre at 15 Con the A
quantity of naphtha consumed in the manufacture of the said
products :

Provided that where the use is elsewhere than in the factory of
manufacture the procedure set out in Chapter X of the Central
E){cise Rules, 1944 is followed. .B

Explanation :

1. The amount of naphtha consumed in the manufacture of the
products shall be calculated by subtracting from the quantity of C
naphtha received by the factory manufacturing the products the
quantity of naphtha returned by the factory to a refinery, declared
as such under sub-rule (2) of rule 140 of the Central Excise Rules,
1944.

2. In cases where certain goods which are incidental, inevitable, or D
involuntary to the process of manufacture the products specified
in the said Table are produced in the course of the manufacture,
the exemption under this notification shall not be denied for the
reason that the said goods are not products specified in the said
Schedule.
E
TABLE
1. Ethylene
2. Propylene
3. Butadiene
F
4.
5.
6. Benzene
7. Toluene
G
8. Para-Xylene

According to the appellant the entire quantity of raw naphtha I ob-
tained by it is subjected to thermal cracking and is further subjected to
fractipn and other processes to extract or manufacture these products. At
an in(ermediate stage of manufacture, one of the by-products obtained is H
722 SUPREME COURT REPORTS (1997] 2 S.C.R.

A pyrolysis Gasolene .. Pyrolysis Gasolene is further. processed by the appel-
lant to obtain Benzene and Toluene which are products enumerated in the
Table. The residue left after this manufacture is further processed to
produce Petroleum Resins. Petroleum Resins are not listed in the Table.
What is left over is returned to the refinery.

B The Collector, Central Excise held that the entire quantity of
Pyrolysis Gasolene which was presumed by him to be raw naphtha, was not
entitled to concessional rate of duty as it was used for the manufacture of
Petroleum Resins. He levied a duty of Rs. 24,41,99,988.77, ordered confis-
cation of land, building, plant, machinery with option to the appellant to
C redeem them on payment of Rs. 1 lac and imposed a penalty of Rs. 5
crores.

In appeal the Tribunal held that Pyrolysis Gasolene used for
manufacture of Benzene and Toluene was entitled to concessional rate of
duty. But the residual Pyrolysis Gasolene used for the manufacture of
D Petroleum resins was not so entitled. It reduced the duty to Rs. 4.36 crores
and reduced the penalty to Rs. 10 lacs. The present appeal· is from this
order.

Broadly speaking, the process of manufacture adopted by the appel-
E !ant is as follows :

Raw Naphtha which is obtained by the appellant at a concessional
rate of duty under the above notification is cracked at high temperature as
a result of which (1) olefenic rich gas (2) pyrolysis fuel oil and (3) pyrolysis
gasolene are produced. Out of these, olefenic rich gas is further processed
F for the purpose of obtaining ethylene, butediene, propylene and other
items enumerated in the Table. Residual gas is flared while the residue is·
returned to naphtha cracker. The products which are obtained by the
further processing of olefenic rich gas are all covered by the table in the
concession notification. Pyrolysis fuel oil which is the second resultant of
G the thermal cracking process is used internally as fuel and is also removed
as carbon black feed stock.
----·
U pto this stage the respondent has accepted that the appellant has
complied with the requirements of the above notification. The difficulty in
the present case has arisen on account of the third resultant of the thermal
H cracking processing, namely, pyrolysis gasolene. P}Tolysis gasolene which
INDIAN PETROCHEMICALS'· COLLECTOR OF CENTRAL EXCISE [MRS. SUJATA V. MANOHAR, l.J 7'23

arises in the process of thermal cracking is further processed by the A
appellant in order to obtain benzene and toluene which are also
enumerated items. Since 1984 the appellant has put up a Petroleum resin
plant. ?After the extraction of benzene and toluene, the residual pyrolysis
gasolene is further processed in the petroleum resin plant of the appellant.
The residual product is given a C8.C9 Cut which ultimately results in the B
manufacture of petroleum resins. Petroleum resins are not mentioned in
the table annexed to the above exemption notification.

According to the respondent, the appellant has diverted pyrolysis
gasolene for the manufacture of petroleum resins and, therefore, pyrolysis
gasolene to the extent that it is used for the manufacture of petroleum C
resins cannot be granted concessional rates of excise duty. Accordingly
under the impugned order of CEGAT, duty of excise must be calculated
on the balance of residue of pyrolysis gasolene "diverted" for C8.C9 Cut
and not on the entire pyrolysis gasolene as earlier held by the department. .
As a result the appellant has become liable. to pay duty calculated ap-
proximately at Rs. 4.36 crores instead of Rs. 24,41,99,988.77 as earlier held D
by the department.

In order to decide whether the findings of Tribunal are correct, we
must examine the terms of the notification in question. The notification
exempts raw naphtha intended for use in the manufacture of products E
specified in the table attached to it from so much of the duty of excise as
is in excess of the amount calculated at the rate of Rs. 60 per kilolitre at
15 C on the quantity of naphtha consumed in the manufacture of the said
products. It is an accepted position that the appellant has used raw naphtha
which was obtained by the appellant under the notification for the F
manufacture of products which are listed in the table.

The only contention of the department is that the appellant has not
used the entire quantity of raw naphtha for this purpose. This contention
does not appear to be correct. The entire quantity of raw naphtha which
was obtained by the appellant under the exemption notification is subjected G
to thermal cracking for the purpose of obtaining ethylene, butadiene,
propylene and other items which are incorporated in the said table. After
the entire quantity of raw naphth<1js subjected to thermal cq1cking, three
items emerge; olefenic rich gas, pyrolysis fuel oil and pyrolysis gasolene.
There is no way in which the appellant could have avoided this outcome. H
724 SUPREME COURT REPORTS (1997] 2 S.C.R.

A · Out of these resultants, olefenic rich gas is required to be further processed
for the manufacture of items forming part of the table. One of the other
resultant products, namely, pyrolysis gasolene is further processed to ob-
tain some more products which are listed in the table, namely, benzene and
toluene. For this processing of pyrolysis gasolene also the department has
no objection because as a result of processing of pyrolysis gasolene the
B
products which are obtained are listed in the table.

However, the further processing of residual pyrolysis gasolene after
extraction of benzene and toluene in the petroleum resin plant on the -
I
-
appellant is objected to by the department. This further processing of
C pyrolysis gasolene residue results in production of petroleum resins which
are not enumerated in the said table. There is no dispute that on petroleum
resins so manufactured the appellant is paying duty of excise. The only
dispute is as to the duty of excise to be levied on pyrolysis gasolene residue
which is processed in the petroleum resin plant of the appellant to
D manufacture resins. According to the respondent the portion of the
residual pyrolysis gasolene consumed in the manufacture of Petroleum
resins should have been returned to the refinery.

In the first place the contention of the respondent that the appellant
has diverted raw naphtha to the manufacture of petroleum resins is not
E correct. What the appellant obtained under the exemption notification was
raw naphtha which was subjected to thermal cracking. The entire quantity
of raw naphtha so obtained was subjected to processing for the purpose of
obtaining items enumerated in the table. The appellant did not set apart
any quantity of raw naphtha for the purpose of obtaining petroleum resins.
F It has merely subjected the residual pyrolysis gasolene to further processing
in the petroleum resin plant for the manufacture of petroleum resins. This
residual pyrolysis gasolene cannot be equated with raw naphtha which was
obtained at concessional rate of duty. Explanation 2 of the notification
provides that in cases where certain goods which are incidental, inevitable
or involuntary to the process of manufacture of the products specified in
G the said table are produced in the course of manufacture the exemption
under this notification shall not be denied on the ground that these goods
are not products specified in the said Schedule. In fact, the respondent has
issued a clarification with the concurrence of the Ministry of Law bearing
G.I. (D.R. & D.) F. No. 03!15n2-Cx.3 dated 26.3.1976 setting out as follows
H
INDIAN PE1ROCHEMICALS '· COLLECTOR OF CENTRAL EXCl~E [MRS. SUJATA V. MANOHAR, J. J 725

".......... it is clarified that when raw naphtha is intended for use in A
the manufacture of any one or more of the products specified in
the Schedule appended to the notification the production of other
goods which are incidental/inevitable/involuntary in such produc-
tion would not disturb the scheme of exemption and that the whole
of the raw naphtha would be deemed to have been used in the B
manufacture of the product for the manufacture of which raw
naphtha was obtained."

In this connection, our attention is drawn to a decision of this Court
in the case of State of Haryana v. Dalmia Dadri Cement Ltd. [1987] Supp.
SCC 679. In that case, cement required for use in the generation or C
distribution of electrical energy was exemptea from sale tax. The Punjab
State Electricity Board had obtained the cement and given certificates that
it was for use in the generation or distribution of electrical energy. The
Court said that the mere fact that some of the cement supply was, in fact,
used by the Board for activities not directiy connected with the generation D
or distribution of electrical energy cannot make any difference to the
availability of the exemption. The intention of the board was that the
cement was directly connected with the generation or distribution of
electrical energy.

In the present case, the entire raw naphtha which is obtained at E
concessional rates of duty is made use cif for the purpose of obtaining
products permitted under the said exemption notification. Only some of
the processed residue is used for the manufacture of other products. There
is, therefore, no violation in the present case of the exemption notification.
F
In the case of M/s. Steel Authority of India Ltd. v. Collector of Central
Excise, C.A. Nos. 3406-11/90 with C.A. No. 3178/90 decided by this Court
on 30-7-1995, S.P. Bharucha and K.T. Thomas, JJ.) raw naphtha was
subjected to a concessional rate of duty under an exemption notification
provided that it was intended for use in the manufacture of fertilizers. Raw
naphtha which was so obtained by SAIL was according to the revenue not G
used entirely for the manufacture of fertilizers. According to SAIL, be-
cause of abnormal operating conditions there was excessive consumption
of raw naphtha on account of low load operation, interruption in the plant
operations due to low, uncertain and fluctuating availability of power. Also
consumption of naphtha was further high because gases produced out of H
726 SUPREME COURT REPORTS [1997] 2 S.C.R.

A raw naphtha had to be vented due to acute power crisis causing interrup-
tion/stoppages of down stream units of the plant. The Court said that
although raw naphtha for reasons beyond the control of SAIL did not, in
fact, result in the manufacture of fertilizer and had to be vented at an
interim stage, nevertheless it could not be said that SAIL had violated any
B condition of the exemption notification because raw naphtha which was fed
by SAIL into its plant was for the purpose and with the intention of
manufacturing fertilizers. It was only because of supervening circumstances
that the reformed gas produced during the interim stage of manufacture
had to be vented out.

C In the present case, pyrolysis gasolene is an incidental product which
has been further processed -to obtain petroleum resin. This cannot be
considered as a diversion of raw naphtha obtained at concessional rates
for manufacture of other items.

In this connection, the appellant has drawn our attention to another
D exemption notification being Notification No. 28/89-C.E. also dated
1.3.1989 which is as follows :

"Exemption of goods other than blended or compounded lubricat-
ing oils and greases. - In exercise of the powers conferred by
sub-section (1) of section SA of the Central Excise and Salt Act,
E 1944 (1 of 1944), the Central Government, being satisfied that it
is necessary in the public interest so to do, hereby exempts goods
(other than blended or compounded lubricating oils and greases)
falling under Chapter 27 of the Schedule to the Central Excise
Tariff Act, 1985 (5 of 1986) produced in a factory and -
F
. (a) utilised in the factory in which the said excisable goods
1 are produced, for the manufacture of other goods or as fuel
for such manufacture (excluding fuel used for any internal
combustion engine) or both; or

G (b) allowed to escape in the atmosphere by flare system or
otherwise;

from the whole of the duty excise leviable thereon which 1s
specified in the said Schedule."

H Under this notification pyrolysis gasolene which falls under chapter
INDIAN PE'l'ROCHEMICALS '· COLLECI'OR OF CENTRAL EXCISE (MRS. SUJATA V. MANO HAR, l.J 727

27 is produced in the appellant's factory and it is utilised for the manufac- A
ture 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 lcviable on it.
Therefore, we fail to see how any duty of excise can be levied on any part
of pyrolysis gasolene manufactured in the factory of the appellant.

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

The appeal is, therefore, allowed. the appellant is not liable to pay
any duty of excise on pyrolysis gasolene. The impugned order of Tribunal C
is, therefore, set aside. There will, however, be no order as to costs.

S.V.K.I. Appeal allowed.