Taxation Law | Exemption For Naphtha Depends On 'Intended Use' At Procurement, Not Actual Exclusive Use: Supreme Court

"It is important to note that the exemption notification required proof that the raw naphtha was ‘intended for use’ in the manufacture of fertiliser and not that the raw naphtha was used in the manufacture of fertiliser." Supreme Court, in a significant ruling, held that the benefit of excise duty exemption on Naphtha cannot be denied merely because a fraction of the steam generated from it was used for non-fertilizer purposes, provided the "intended use" at the time of procurement was for fertilizer manufacture.

A bench of Justice Ujjal Bhuyan and Justice Manoj Misra observed that once an assessee is found eligible for an exemption, the notification must be construed liberally, and the term "intended use" does not imply "exclusive actual use."

The appellant, M/s. Rashtriya Chemicals and Fertilizers Limited, a Government of India Public Sector Undertaking (PSU), procured Naphtha at a nil rate of duty for the manufacture of fertilizers and ammonia. The Revenue alleged that since Naphtha was burned in a common boiler along with natural gas to generate steam used across fertilizer, chemical, and heavy water plants, the appellant was ineligible for the exemption. Consequently, the Commissioner confirmed a duty demand of over Rs. 28 crores by invoking the extended period of limitation, a decision largely upheld by the CESTAT.

The primary question before the court was whether the expression "intended use" in exemption notifications necessitates proof of exclusive actual use in the manufacture of fertilizers. The court was also called upon to determine whether the Revenue could validly invoke the extended five-year period of limitation under the proviso to Section 11A(1) of the Central Excise Act against a PSU in a revenue-neutral transaction.

The Court began by analyzing the language of Exemption Notification Nos. 75/1984-CE and 4/1997-CE, noting that the word "exclusively" was conspicuously absent from the text. The Bench emphasized that the eligibility for exemption is determined by the purpose for which the goods are cleared. Drawing on the constitution bench decision in Commissioner of Customs (Import), Mumbai v. M/s Dilip Kumar and Company, the court noted that while the applicability of an exemption must be strictly interpreted, once the assessee crosses the threshold of eligibility, the notification should be bestowed a wider and liberal construction.

"Once the ambiguity or doubt is resolved by interpreting the applicability of the exemption clause strictly, the court may construe the notification by giving full play bestowing wider and liberal construction."

Addressing the core controversy regarding "intended use," the Court relied on the precedents set in State of Haryana v. Dalmia Dadri Cement Limited and Steel Authority of India v. Collector of Central Excise. The Bench observed that if the legislature intended to limit the exemption to actual use, it would have used phrases such as "actually used" or "goods used" instead of "intended for use." The Court found that the Naphtha fed into the common boiler was primarily intended for fertilizer manufacture, and the technical impossibility of apportioning steam from two different fuels did not negate this intent.

"In the context, what was required to be shown was that the raw naphtha was used for the purpose and with the intention of manufacturing fertiliser."

The Bench further noted the factual reality that Naphtha was in short supply during the relevant period and was used only to supplement natural gas. Evidence showed that the total quantity of Naphtha procured was insufficient even to meet the total steam requirement of the fertilizer plant alone. The Court held that in such circumstances, any inference of diversion for non-fertilizer purposes was based on mere speculation and arithmetical calculations rather than concrete evidence of misuse.

"The mere fact that some of the cement [or Naphtha] supplied was in fact used by the Board for activities not directly connected with the generation or distribution of electrical energy [or fertilizer] would not make any difference regarding the availability of the exemption."

On the issue of the extended period of limitation, the Court held that the Revenue failed to prove "willful suppression" or "intent to evade duty" required under the proviso to Section 11A(1). The Bench pointed out that the appellant, being a PSU, consistently followed the Chapter X procedure and obtained CT-2 certificates from jurisdictional officers. Furthermore, the Court highlighted the concept of revenue neutrality, noting that since the appellant receives government subsidies, any duty paid would eventually be reimbursed, leaving no incentive for evasion.

"Where facts are known to both the parties, the omission by one to do what he might have done and not that he must have done does not render it suppression."

The Court concluded that since the transaction was revenue-neutral and involved a bona fide interpretation of a statutory notification, the invocation of the extended limitation period was entirely unwarranted. Citing Nirlon Limited v. Chief Commissioner of Excise, the Bench reiterated that when an assessee derives no benefit from evading duty, the charge of suppression cannot be sustained. Consequently, the Court set aside the duty demands and the associated penalty under Section 11AC of the Central Excise Act.

"When the entire exercise was revenue neutral, the appellant could not have achieved any purpose by evading payment of excise duty."

The Supreme Court allowed the appeals, setting aside the orders of the Commissioner and the CESTAT. The ruling clarifies that "intended use" in tax exemptions focuses on the objective at the time of procurement and protects manufacturers from duty demands based on incidental or technically unavoidable non-primary use. This judgment provides significant relief to PSUs by reinforcing that revenue-neutrality precludes the allegation of willful suppression.

Date of Decision: 24 March 2026