Supreme Court Clarifies ‘For Use’ Test: Eligibility for Excise Duty Exemption Determined at Time of Procurement, Not Actual Use [Read Judgement]

In a recent ruling, the Supreme Court of India clarified that tax exemptions linked to the phrase “for use” must be evaluated based on the intended purpose at the time of procurement, not the actual or incidental use during manufacturing, and settled a long-standing dispute about a public sector undertaking, over its eligibility for duty-free Naphtha under central excise notifications.

CentralExcise officers inspected the petitioner, Rashtriya Chemicals and Fertilisers Ltd., in 2001 and alleged that duty‑free Naphtha, procured for fertiliser production, was also being used in other units like chemical and heavy water plants.

This led to a series of show-cause notices demanding over ₹28 crore in excise duty, followed by multiple adjudication orders confirming duty and penalties. The company challenged these before the CESTAT, which partly upheld the demands, and later before the Bombay High Court, which dismissed its appeal.

The appellant, Rashtriya Chemicals and Fertilisers Ltd., argued that it was fully entitled to duty‑free Naphtha under the exemption notifications since the product was intended for use in fertiliser and ammonia manufacture.

Also pointed out that the Naphtha procured was insufficient even for fertiliser needs alone, making diversion implausible, and that it had consistently obtained CT‑2 certificates from excise authorities confirming compliance.

Relying on Supreme Court precedents, they stressed that “for use” means intended use at procurement, not actual end use, and as a public sector undertaking receiving subsidies, they had no motive to evade duty. They also contended that any duty impact would be revenue‑neutral, so invoking extended limitations and penalties under Section 11AC was unjustified.

On the other hand, the Additional Solicitor General, appearing for the revenue, strongly supported the CESTAT and High Court orders. He argued that the appellant wrongly claimed an exemption on Naphtha because inspections showed it was used not only in fertiliser and ammonia plants but also in turbo generators, chemical plants, and a heavy water plant.

It was further contended that part of the electricity generated from Naphtha was even supplied outside (to the Maharashtra State Electricity Board), and calculations showed that significant quantities of Naphtha were consumed in non‑fertiliser units.

After considering the matters, appeals, and conflicting orders, the court noted that “for use” must be read as intended use, not actual use. Once the assessee procures Naphtha under CT‑2 certificates declaring fertiliser use, the exemption applies even if incidental consumption occurs elsewhere.

The Court relied on precedents like Steel Authority of India v. Collector of Central Excise and State of Haryana v. Dalmia Dadri Cement Ltd., which clarified that “for use” equates to “intended for use” and it noted that the appellant consistently obtained CT‑2 certificates from excise authorities, proving declared intent.

The Court found the revenue’s insistence on “exclusive use” unsupported, since the notifications never required exclusivity, and as a public sector undertaking receiving subsidies, RCF had no motive to evade duty, and any duty impact was revenue‑neutral.

The bench of Justice Ujjal Bhuyan and Manoj Misra noted that “it is evident that all along appellant had furnished the requisite particulars to the central excise authorities based on which the jurisdictional officer had issued CT-2 certificates. On the strength of such certificates, appellant had availed exemption from payment of excise duty on the procured Naphtha which was mostly used in the manufacture of fertilizer and ammonia.”

The Supreme Court concluded that Rashtriya Chemicals must succeed both on the merits and on limitation. As a result, the Court set aside the orders‑in‑original dated 27 January 2010 and 4 February 2010, as well as the CESTAT’s order dated 27 March 2012.

Accordingly, the connected civil appeals (Nos. 2219–2220 of 2013) were allowed, while the appeal arising out of SLP (Civil) No. 21441 of 2013 was treated as academic and disposed of accordingly. The Court made no order as to costs.

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