For Use Test Clarified for Excise Exemptions at Rashtriya Chemicals and Fertilizers Limited

(INDIA) — The Supreme Court of India ruled on March 24, 2026, that excise duty exemptions for naphtha meant for fertilizer manufacture turn on the buyer’s intention at the time of procurement, not on proof of exclusive actual use at every later stage, and quashed a ₹28.56 crore demand against M/s. Rashtriya Chemicals and Fertilizers Limited.

The judgment came in M/s. Rashtriya Chemicals and Fertilizers Limited v. Commissioner of Central Excise and Service Tax (LTU), Civil Appeal Nos. 2219-2220 of 2013, with related SLP (Civil) No. 21441 of 2013 disposed as academic. Justice Manoj Misra and Justice Ujjal Bhuyan set aside orders-in-original dated January 27, 2010, and February 4, 2010, as well as a CESTAT order dated March 27, 2012.

At the center of the case was a dispute over excise duty exemptions under Notifications Nos. 75/84-CE and 4/97-CE for naphtha described as “intended for use” in the manufacture of fertilizer or ammonia. The court held that this “For Use” Test must be applied when the naphtha is procured, rejecting the revenue’s position that the exemption failed unless the fuel could be shown to have been used exclusively in the specified end product.

That holding resolved a long-running fight over operations at the Thal plant in Maharashtra run by Rashtriya Chemicals and Fertilizers Limited, a public-sector company. The revenue had argued that part of the steam generated from a mixed-fuel boiler went to turbo generators for electricity, and that this broke the condition for excise duty exemptions.

“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. Due emphasis has to be given to the clear language… and its effect cannot be nullified.”

The bench, however, anchored its ruling in the wording of the notifications themselves. That reading placed the court’s focus on declared purpose at the point of procurement rather than on a demand for product-by-product tracing through an integrated industrial process. In doing so, the bench rejected the argument that every downstream use had to remain exclusively tied to the named final goods for the benefit to survive.

The court also relied on Steel Authority of India Vs. Collector of Central Excise (1996), treating the notification language and compliance with Chapter X procedures of the Central Excise Rules, 1944 as central to the analysis. Once procurement met the prescribed requirements and the intention was bona fide, the later inability to segregate molecules of fuel in a common boiler did not, by itself, strip away the exemption.

That point mattered because the dispute did not arise from any allegation that naphtha had been diverted for unrelated sale in the market. It arose from plant-level operations inside an integrated production system, where fuel and steam moved through common facilities tied to fertilizer and ammonia manufacture.

Rashtriya Chemicals and Fertilizers Limited had procured duty-free naphtha from Hindustan Petroleum Corporation Limited at its Thal, Maharashtra plant during the years from 1996-2005 for urea and ammonia production. The controversy sharpened after officers found in February 2001 that some steam from a mixed-fuel boiler was going to turbo generators to produce electricity.

That electricity, the case records showed, was used in chemical plants or supplied to Maharashtra State Electricity Board. Revenue treated that as use beyond the specified products and said the exemption therefore failed because the naphtha was not used exclusively for fertilizer or ammonia.

The bench did not accept that approach. It said the technical mixing of naphtha with natural gas in a common boiler, which made segregation impossible, could not defeat the claim where the original intention remained tied to fertilizer manufacture and there was no diversion.

That finding addressed the core factual premise of the demand. In practical terms, the court accepted that an integrated fertilizer complex could not always isolate each unit of fuel at every stage when common boilers and common steam systems formed part of the production set-up.

Senior Counsel Balbir Singh, appearing for Rashtriya Chemicals and Fertilizers Limited, argued that the naphtha was procured for fertilizers and that common boiler use reflected operational necessity. He said naphtha shortages had to be supplemented by natural gas, and once the two fuels entered the same boiler, segregation became impossible.

RCF also argued revenue neutrality. As a government-controlled PSU, it said any duty burden would be reimbursed through government subsidy, leaving no gain from evasion.

Additional Solicitor General Vikramjit Banerjee, appearing for the revenue, argued that the company had claimed through CT-2 certificates that the goods were meant “only” for fertilizers. On that reasoning, he said the exemption could not cover fuel that ultimately contributed to products outside the specified category, including chemicals or heavy water.

That clash framed the case as a contest between documentary declarations and industrial reality. Revenue relied on the certificate wording and on the proposition that non-exclusive end use was fatal, while the company argued that the certificates had to be read alongside the actual design and functioning of a fertilizer plant where energy streams served interconnected units.

The court sided with the company on that central point. It treated the words “intended for use” in the notifications as decisive and refused to rewrite them into a stricter requirement of proved exclusive actual use.

That distinction is likely to carry weight beyond this case because many exemption disputes turn on whether a notification speaks in terms of declared purpose, actual end use, or both. Here, the bench read the language narrowly and literally, placing legal weight on intention at procurement and on adherence to the prescribed excise procedures.

By doing so, the court drew a line between misuse and mixed operational use. The judgment did not treat technical commingling in a common boiler as equivalent to diversion, and it did not accept that electricity generation within the integrated set-up automatically destroyed the exemption when the fuel had been procured for fertilizer and ammonia production.

The limitation issue gave the company a second, independent win. The court rejected the five-year extended period, holding that deliberate suppression had not been established.

On that point, the bench referred to Pushpam Pharmaceuticals Company Vs. Collector of Central Excise. It found no mala fide intent on the part of Rashtriya Chemicals and Fertilizers Limited.

Revenue neutrality also weighed in the company’s favor on limitation. The court accepted the relevance of the company’s status as a government-controlled PSU and the subsidy structure it cited, concluding that these circumstances cut against the allegation that the company had suppressed facts to evade duty.

That part of the ruling mattered because extended limitation in excise cases usually depends on a stronger finding of intent. Without deliberate suppression, the revenue lost not only on the interpretation of the exemption but also on the time bar it had invoked to sustain the demand.

The combined effect was sweeping. The appeals were allowed, and the demand was quashed on merits as well as limitation.

The judgment therefore wiped out the foundation of the case against the company on both fronts: first, by holding that the exemption applied under the “For Use” Test at the time of procurement, and second, by holding that the revenue could not rely on the extended period in the absence of deliberate suppression or mala fide conduct.

For excise law, the ruling gives fresh force to the exact words used in exemption notifications. Where a notification grants relief to inputs “intended for use” in a specified manufacture, the court has now made clear that the inquiry begins with intention at procurement and with compliance under the applicable rules, not with a later search for exclusive use in every operational segment of a complex plant.

For manufacturers, especially those running integrated facilities, the decision recognizes how production systems actually function. Common boilers, mixed fuels, steam lines and captive power arrangements may complicate tracing, but the court’s approach shows that such complexity does not by itself cancel excise duty exemptions if the original procurement was bona fide and tied to the notified purpose.

For tax administrators, the judgment narrows the space for treating every non-exclusive downstream use as disqualifying. It also signals that allegations of suppression will face close scrutiny where the assessee is operating within documented procedures and where revenue neutrality weakens the claim of any motive to evade.

The dispute began with naphtha supplied for urea and ammonia production at a fertilizer complex and ended with a broader statement of principle from the country’s highest court. By quashing the ₹28.56 crore demand against Rashtriya Chemicals and Fertilizers Limited, the bench said the law must follow the language of the notification: when the exemption turns on goods “intended for use,” the decisive moment is procurement, not every later turn of the plant’s boilers and turbines.