• Dated 06^th April, 2026

No Denial of Exemption for Connected/Indirect Use in Manufacturing Process: SC

Brief Facts

The Hon'ble Supreme Court examined whether exemption on fuel (Naphtha) can be denied when a small portion is used indirectly within the factory. The Assessee, a fertilizer manufacturer, had procured Naphtha without payment of excise duty under Notification Nos. 75/84-CE dated 01.03.1984 and 4/97-CE dated 01.03.1997 as amended, which grant exemption when the fuel is used for the manufacture of fertilizer. The Naphtha was utilized to generate steam, an essential input for running the plant. While the majority of the steam was used directly in fertilizer production, a portion was also used for generating electricity and other connected activities within the plant. The department contended that since the fuel was not used exclusively for fertilizer production, the exemption was wrongly availed, and accordingly raised a demand along with penalty alleging misuse.

Assessee's Contention

The Assessee argued that the fuel was purchased with the clear intention of using it for fertilizer production and that in a modern factory, different processes are interconnected, so some indirect use is unavoidable. It was also pointed out that all relevant details were disclosed to the department and permissions were taken, and there was no attempt to hide anything. Further, even if tax had been paid, it would have been neutral since the company would get the benefit back through subsidy or credit, meaning there was no incentive to evade tax.

Department's Contention

The Department contended that exemption should apply only when the fuel is actually used strictly for fertilizer and since part of it was used for other purposes, the benefit should be denied. It also alleged that the Assessee had not properly disclosed the actual usage and therefore the extended time limit and penalty should apply.

Court Held

The Supreme Court rejected the department's approach and held that what is important is the main purpose or intention behind procuring the fuel and not a strict or exact use in every stage. The Court recognized that in an integrated plant, use of inputs in connected processes like electricity generation is a normal part of manufacturing. It further held that since the Assessee had disclosed all facts and acted with proper permissions, there was no suppression or intention to evade tax, and therefore extended limitation and penalty could not be applied. Accordingly, the demand and penalty were set aside.

BTA Comment

This judgment is a significant and practical reaffirmation of how exemption notifications should be interpreted in real industrial settings. The Supreme Court has rightly moved away from a rigid, technical approach and emphasized that "intended use" must be understood in a commercial and functional sense, especially in industries where manufacturing processes are inherently integrated. Expecting a strict, one-to-one correlation of input usage in such environments would be unrealistic and contrary to ground realities. Overall, this ruling provides much-needed clarity and relief to industries relying on common utility systems like steam and power, and serves as a strong precedent against hyper-technical denial of exemptions.

Case ref- RASHTRIYA CHEMICALS AND FERTILIZERS LTD-Versus-COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX (LTU) (2026) 40 Centax 293 (S.C.) [24-03-2026]

Author: Aindrila Ghosh

Edited by: Madhurima Bose