1. The present appeal was originally filed as a Revision Application before the Central Government against Order-in-Appeal No. 246/81 dated 31-3-1981 passed by the Appellate Collector of Central Excise, Madras.
On the setting up this Tribunal, it was transferred in terms of Section 35-P of the Central Excises and Salt Act to this Tribunal to be disposed of as if it were an appeal filed before the Tribunal.
2. The facts of the case, briefly stated, are that M/s. Neyveli Lignite Corporation Ltd., the appellants (hereinafter referred to for brevity's sake as N.L.C.) received a quantity of 4451.716 K.L. of Furnace Oil during the period from March, 1979 to 15-7-1979 without payment of Excise duty under Chapter X Procedure to be used as feed-stock in the manufacture of fertilizer in accordance with Central Excises Notification No. 147/74 dated 30-10-1974. The actual manufacture of fertilizer (urea) commenced only from 16-7-1979. Till this date the furnace oil obtained in terms of the aforesaid notification was used for stabilisation and test-run of the oil gasification plant. The Departmental Authorities considered that such use of the furnace oil was not use as feedstock in the manufacture of fertilizer but use otherwise. On this basis they held that the aforesaid quantity of furnace oil attracted Central Excise Duty at the rate of Rs. 61.05 per K L. in accordance with Central Excise Notification No. 195/76 dated 10-6-1976. The duty due on the said quantity of furnace oil was worked out at Rs. 2,71,777.26. Accordingly, a show cause notice was issued to N.L.C. by the Superintendent of Central Excises asking them to show cause why the said amount of duty should not be demanded from them under Rule 10 of the Central Excises Rules. In their reply, N.L.C, while admitting that the actual production of fertilizer based on furnace oil as feed-stock commenced only from 16-7-1979, the furnace oil used during the start-up and trial-run period prior to 16-7-1979 should be construed as used as feed-stock only in the manufacture of fertilizer. Such tests and trial-runs were inevitable in any fertilizer factory. In this connection, they placed reliance on a letter F. No.83/11/72/CX 3 dated 22-2-1974 from the Under Secretary to the Ministry of Finance to the Collectors of Central Excise. In the said letter the Ministry clarified that raw-naphtha obtained by a fertilizer unit operating under Chapter X Procedure in terms of Central Excise Notification No. 187/61 dated 23-12-1961 consumed during the period of trial-runs and commissioning of the plant would be raw-naphtha intended for the use in the manufacture of fertilizer. Whether it was used wholly as feed-stock or partly as feed-stock and partly as processed fuel, the concessional rate of duty would be available in such cases.
The Assistant Collector who adjudicated the case did not accept N.L.C's contentions. He held that Notification No. 147/74 did not apply in the instant case but Notification No. 195/76 in terms of which duty at Rs. 61.05 per K.L. was chargeable on furnace oil used otherwise than as feed-stock in the manufacture of fertilizer. The Assistant Collector, considered that the analogy of the Government's instructions regarding raw-naphtha was not applicable to the prcent case. In view of the two distinct notifications, he held that the use of the furnace oil at the commissioning stage could be considered as use in the manufacture of fertilizer but not use as feed-stock in the manufacture of fertilizer.
Accordingly, he confirmed the demand of duty.
3. In appeal, the Appellate Collector of Central Excise, Madras confirmed the Assistant Collector's order.
4. In the Revision Application (the appeal before us), it has been stated that the plants in the fertilizer unit, before the production of fertilizer commences, have to be tested for pressure, strength, etc.
The sections tested are the Gasification, Desulphurisation and Decarbonation sections. After installation and erection, these sections have to be tested one-by-one for their correct performance with the gas obtained by gasification of Furnace Oil to ascertain whether the equipments give the guaranteed performance in all respects. It is stated that, in the gasifier, for example, the test run has to be conducted for a few hours and only after the inspection is done and the machine is run continuously the gas can be sent to the next section.
Similarly, the gas has to be kept on line in the Desulphurisation and Decarbonation sections till the expected parameters and analysis of gas is obtained. It is further stated, even though the complete switchover to Furnace Oil as feed-stock was effected from 16-7-1979, the N.L.C.had been making combined operation from 4-7-1979 to 15-7-1979 intermittantly by utilising some of the gas from the oil gasification process also for urea production. Accordingly, it is stated, a quantity of 2085 metric tonnes urea would be relatable to oil as feed-stock during the period from 4-7-1979 to 15-7-1979, though in the relevant excise records the urea production entries were made from 16-7-1979 the date from which the fertilizer factory was run solely on furnace oil as feed-stock. It is averred that the aforesaid quantity of furnace oil was not used as fuel but was used only as feedstock in the manufacture of fertilizer.
5. We have heard Shri V.N.R. Rao, Senior Advocate with Shri S.Raghunathan, Technical Manager for the appellants and Shri S.N. Khanna, Departmental Representative for the respondent.
6. Shri Rao elaborated at length the contentions put forward in the memorandum of appeal. He particularly stressed that no urea was produced till 17-7-1979; during the preceding period the furnace oil obtained under Chapter 10 Procedure was used only as feed-stock and not as fuel (there is an inconsistency between this and the memorandum of appeal inasmuch as the latter says that a quantity of urea was relatable to the trial period). He submitted that the words used in the Notification 147/74 namely "intended for use as feed-stock in the manufacture of fertilizers" were significant. N.L.C's. intention was to use the furnace oil only as feed-stock and not otherwiss than as feed-stock i.e. as fuel. Notification 195/76 applied to use of furnace oil otherwise than as feed stock i.e. as fuel which was not the case in the present matter. There has been no allegation that the furnace oil obtained under Chapter X Procedure was used as fuel oil or that it was misused. Notification No. 187/61 regarding exemption for raw-naphtha intended for use in the manufacture of fertilizer read with the Finance Ministry's clarification dated 22-2-1974 (referred to earlier) fully supported the stand of N.L.C. Shri Rao also relied upon the decision of the Central Board of Excise and Customs reported in 1982- E.L.T. 421.
7. Shri S.N. Khanna, Departmental Representative urged on behalf of the respondent that the furnace oil in the present case was not used as feed-stock which is a pre-condition for the exemption in Notification 147/74. Notification 187/61 regarding raw-naphtha was not analogous and the Ministry's clarification relied upon by the counsel for N.L.C. was not applicable since the notification there was different. Regarding Board's order-in-appeal relied upon by the counsel Shri Khanna stated that the notification would prevail over the said decision.
8. We have carefully considered the submissions of both sides. It is necessary to ascertain the meaning of the expression "feed-stock" for the purpose of arriving at a proper decision in the present case. The following are taken from dictionaries- (The McGraw-Hill Dictionary of Scientific and Technical Terms, Second Edition.) 1"Gaseous or liquid petroleum-derived hydrocarbons or mixtures or hydrocarbons from which gasoline, fuel oil and petrochemicals are produced by thermal or catalytic cracking. It is also called charging stock. Feed-stocks commonly used include ethane, propane, butane, butene, benzene, toluene, xylene, naphtha and gas oils." (The Condensed Chemical Dictionary, Tenth Edition, Revised by Gassner G. Hawley.) It is clear from the above extracts that feed-stock refers to raw material delivered to a machine for process. In the present case it is an undisputed position that the furnace oil received by N.L.C. from the Indian Oil Corporation was not used as fuel. It was used in the different sections of the fertilizer plant during the period when different units of the plant were undergoing test and trial runs. It is a matter of common knowledge that trial run of a new plant, more so a complex fertilizer plant, is an essential part of the manufacturing process. No new plant can be commissioned without such trial run during which period the different units of the plant are put through various tests to see that they work according to expectation. Till the entire plant is tested, stabilised and commissioned, production on a commercial scale is not achieved. The intention in obtaining furnace oil was undisputably to use it as feed-stock i.e. as raw material to be delivered to the machine in the fertilizer plant. From the process flowsheet for fuel oil based urea production by N.L.C., a copy of which was furnished by Shri Rao during the hearing, it is clear that furnace oil has to go through the stages of gasification, desulphurisation and decarbonation and certain other processes before ammonia is generated ultimately leading to the production of urea.
"The Central Government has exempted furnace oil falling respectively under Item No. 10 of the First Schedule to the Central Excises and Salt ,Act, 1944 (1 of 1944) and intended for use as feed-stock in the manufacture of fertilizers, from- (b) the whole of the additional duty of excise leviable thereon under the Mineral Products (Additional Duties of Excise and Customs) Act, 1958: (i) it is proved to the satisfaction of the Assistant Collector of Central Excise that such furnace oil or heavy petroleum stock is so used, and (ii) the procedure set out in Chapter X of the Central Excise Rules, 1944, is followed.
The first requirement is that furnace oil should be intended for use as feed-stock in the manufacture of fertilizer. There can be little doubt that such indeed was the intention of N.L.C. in obtaining furnace oil from the Indian Oil Corporation under the Chapter X Procedure. The second requirement is that it should be proved to the satisfaction of the Assistant Collector that the furnace oil is so used. According to the averments made in the memorandum of appeal, which gain support from the process flowsheet, the furnace oil in question was used for test and trial runs of the gasification, desulphurisation and decarbonation units of the fertilizer plant and these processes as noted earlier, are essential stages preparatory to the commercial production of urea starting with furnace oil. In our opinion, therefore, the requirement of the notification have been met. The notification relied upon by the lower authorities namely 195/76 dated 10-6-1976 reads as follows :- ' 'The Central Government has exempted furnace oil, falling under Item No. 10 of the First Schedule to the Central Excises and Salt Act, 1944 (1 of 1944) and intended for use, otherwise than as feed-stock in the manufacture of fertilizers, from so much of the duty of excise as is in excess of Rs. 61.05 per kilolitre : (i) it is proved to the satisfaction of the Assistant Collector of Central Excise that such furnace oil is so used, and (ii) the procedures set out in Chapter X of the Central Excise Rules, 1944, is followed.
[vide M.F. (D.R.B.) Notification No. 195/76-C.E., dated 10th June, 1976.] This notification applies in the case of furnace oil intended for use otherwise than as feed-stock in the manufacture of fertilizer. We have seen that the intention in the present case was to use the furnace oil as feed-stock in the manufacture of fertilizers. Therefore, this notification is of no application.
10. In the light of the above conclusion, it is not necessary to refer to the Ministry's classification of 22-2-1974 or the Board's order-in-appeal reported in 1982 E.L.T. 421.
11. We set aside the impugned order and allow the appeal with consequential relief to the appellants which shall be granted within three months from the date of communication of this order.