advocatemmmohan

My photo

ADVOCATEMMMOHAN -  Practicing both IN CIVIL, CRIMINAL AND FAMILY LAWS,Etc.,

WELCOME TO LEGAL WORLD

WELCOME TO MY LEGAL WORLD - FOR KNOWLEDGE IN LAW & FOR LEGAL OPINIONS - SHARE THIS

Tuesday, May 13, 2014

Rule 57A, 57B and 57D alongwith Rule 57CC- Modvat/ Cenvat Credit for the use of inputs in the manufacture of final products which are exempt or subject to nil rate of duty and the requirement of the assessee to maintain separate accounts with respect to inputs used in dutiable goods as well as exempted goods and the liability arising on the failure of the assessee to maintain such separate accounts. - High court allowed the writ petition at show cause notice stage itself - Apex court dismissed the appeal of Union Govt. confirming the lower court orders = Union of India & Ors. ….. Appellant(s) Versus M/s. Hindustan Zinc Ltd. …. Respondent (s)= 2014 ( May.Part) http://judis.nic.in/supremecourt/filename=41508

 Rule 57A, 57B and 57D alongwith  Rule  57CC - Modvat/ Cenvat  Credit  for  the  use  of inputs in the manufacture of final products which are exempt or subject to nil rate of duty and the requirement of  the  assessee  to  maintain separate accounts with respect to inputs used in dutiable goods as well as exempted goods and the liability  arising  on  the  failure  of  the assessee to maintain such separate accounts. - High court allowed the writ petition at show cause notice stage itself  - Apex court dismissed the appeal of Union Govt. confirming the lower court orders =

  i)    Hindustan Zinc Ltd. obtained zinc ore concentrate from the
           mines on the payment of excise duty which is used  as  an  input
           for the production of zinc. Zinc ore is predominantly  available
           as Zinc Sulphide (ZnS).
           
ii)   When ZnS is heated (calcined) at high temperature  in  the
           presence of oxygen, zinc oxide  (ZnO)  and  sulphuric  acid  are
           produced. Zinc  Oxide  is  further  oxidised  to  produce  zinc.
           Sulphur obtained as a technological necessity is a pollutant and
           is, therefore, converted into sulphur dioxide in the presence of
           catalysts  like  Vanadium  Pentaoxide   &   Hydrogen   Peroxide.
           Sulphuric acid is converted into sulphur and the respondent does
           not take  any  Cenvat  Credit  on  the  inputs  used  after  the
           emergence of sulphur dioxide. The sulphuric acid produced  as  a
           by-product  is  sold  on  payment  of  excise  duty  to  various
           industries. Some  quantities  of  sulphuric  acid  are  sold  to
           fertilizer plants in terms of notification No. 6/2002-CE on  the
           execution of bonds by the fertilizer plants to the  satisfaction
           of the excise authorities. The said sulphuric acid is  used  for
           the production of zinc.
           
iii)  The excise department took a view that in terms of Rule 57
           CC of the  Rules,  the  respondents  were  obliged  to  maintain
           separate accounts  and  records  for  the  inputs  used  in  the
           production of zinc and sulphuric acid and in the absence of  the
           same the respondents were obliged to pay 8% as an amount on  the
           sale price of sulphuric acid to the fertilizer plants  in  terms
           of Rule 57 CC. The respondent defended the  more  by  contending
           that the very purpose of the grant  of  exemption  to  sulphuric
           acid was  to  keep  the  input  costs  at  the  lowest  for  the
           production  of  fertilizers    during   the   relevant   period.
           Fertilizers themselves were wholly exempted from the payment  of
           excise duty because the government wanted the farmgate price  to
           the farmer should be at the  lowest.  In  fact,  the  government
           grants subsidies to the fertilizer  plants  for  the  difference
           between the cost of production and sale price determined by  the
           government. It was their defence that any  duty  demand  on  the
           sulphuric  acid  will  defeat  the  very  purpose  of  grant  of
           exemption and make the fertilizer cost higher than the desirable
           level. In such a scenario, such higher  cost  will  have  to  be
           compensated by the government as subsidy. =

entitlement  of
     the Respondents/ assessees to Modvat/ Cenvat  Credit  for  the  use  of
     inputs in the manufacture of final products which are exempt or subject
     to nil rate of duty and the requirement of  the  assessee  to  maintain
     separate accounts with respect to inputs used in dutiable goods as well
     as exempted goods and the liability  arising  on  the  failure  of  the
     assessee to maintain such separate accounts.=

 We have already noticed above that in  the  case  of
     Birla Copper (C.A. No. 2337 of  2011)  the  Tribunal  has  decided  the
     matter following the judgment in the case of Swadeshi Limited  (supra).
     
In that case, Ethylene Glycol was reacted with DMT to produce polyester
     and ethanol. Methanol was  not  excisable  while  Polyester  Fibre  was
     liable to excise duty. Credit was taken of duty paid on ethylene glycol
     wholly for the payment of duty on  polyester.  
The  department  took  a
     position that Ethylene Glycol was used in the  production  of  Methanol
     and proportionate credit taken on ethylene glycol was to  be  reversed.
     
This Court ruled that the emergence of  Methanol  was  a  technological
     necessity and no part of ethylene glycol could be  said  to  have  been
     used in production of Methanol and indeed it was held  that  the  total
     quantity of ethylene glycol was used for the production  of  polyester.
     
The fact in all these three appeals appear to be identical to the facts
     and the law laid down in  Swadeshi  Polytex  (supra).  Therefore,  this
     judgment is squarely applicable.
 26. Furthermore, the provisions of Rule 57CC cannot be read  in  isolation.
     In order to understand the scheme of Modvat Credit  contained  in  this
     Rule, a combined reading of Rule 57A, 57B and 57D alongwith  Rule  57CC
     becomes inevitable. We have already reproduced Rule 57D above.  
It  can
     be easily discerned from a combined reading of the aforesaid provisions
     that the terms  used  are  'inputs',  'final  products',  'by-product',
     'waste products' etc. 
We are of the opinion that these terms have  been
     used taking into account commercial reality in trade.
 In  that  context
     when we scan through Rule 57  CC,  reference  to  final  product  being
     manufactured with the same common inputs becomes  understandable.  
This
     Rule did not talk about emergence of final product and a by-product and
     still said that Rule 57 CC will apply. 
The  appellant  seeks  to  apply
     Rule 57CC when Rule 57D does not talk about application of Rule 57CC to
     final  product  and  by-product  when  the  by-product  emerged  as   a
     technological necessity. 
Accepting the argument of the appellant  would
     amount to equating by-product and final  product  thereby  obliterating
     the  difference  though   recognised   by   the   legislation   itself.
     
Significantly this interpretation by the Tribunal in  Sterlite  (supra)
     was not appealed against by the department.
 27. We are also  unable  to  agree  with  the  submission  of  the  learned
     Secretary General that judgment  in  GAIL's  Case  is  not  applicable.
     
Significantly, the question as to whether Rule 57 CC will apply when by-
     products are cleared without payment of duty  came  for  discussion  in
     that case
It was held that so long as the lean gas was obtained  as  a
     by-product and not as a final product, Rule 57 CC will  not  apply.  
We
     are, therefore, of the view that  the  respondent's  case  is  squarely
     covered by the judgment in GAIL's case.
 28. At the stage we should deal with the argument of non maintainability of
     the writ petition filed by  Hindustan  Zinc  Limited  before  the  High
     Court. 
No doubt, it had  filed  writ  petition  at  show  cause  stage.
     However, it was not merely the validity of show cause notice which  was
     questioned. 
In the writ petition even the vires  of  Rule  57  CC  were
     challenged. 
That was a reason because of which the writ petitions  were
     entertained, and rightly so,  it  is  a  different  matter  that  while
     interpreting the rule, the High Court chose to read down the said  rule
     and to give an interpretation which would save  it  from  the  vice  of
     unconstitutionality. Moreover, other  statutory  appeal  filed  by  the
     Department  is  against  the  order  of  CESTAT,  which  involves  same
     question. Matter is argued in appeal before us also at  length  and  we
     are deciding the same on merits. For all these reasons the argument  of
     alternate remedy has to be discarded.
 29. As a result of aforesaid discussion, we find no merit in these  appeals
     and dismiss the same with costs.   
2014 ( May.Part) http://judis.nic.in/supremecourt/filename=41508

ANIL R. DAVE, A.K. SIKRI
                                                             REPORTABLE

                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION
                        CIVIL APPEAL NO. 8621 OF 2010


     Union of India & Ors.                              ….. Appellant(s)


                                   Versus


     M/s. Hindustan Zinc Ltd.                           …. Respondent (s)


     WITH


     C.A. No. 1181 of 2012
     C.A. No. 2337 of 2011
     C.A. No. 5322 of 2010
     C.A. No. 8622 of 2010
     C.A. No. 8623 of 2010
     C.A. No. 8624 of 2010
     C.A. No. 8625 of 2010
     C.A. No. 8626 of 2010
     C.A. No. 8627 of 2010
     C.A. No. 8628 of 2010
     C.A. No. 8629 of 2010
     C.A. No. 8630 of 2010
     C.A. No. 8631 of 2010


                               J U D G M E N T


     A.K. SIKRI, J.


  1. All these appeals raise identical question of law, which has arisen  in
     almost similar circumstances. In fact, the issue involved  was  decided
     by the High Court in a batch of Writ Petitions filed by M/s.  Hindustan
     Zinc vide judgment dated 23.1.2007 against which SLP under Article  136
     of the Constitution was filed in which leave has been granted. In other
     case, same issue is decided  by  the  CESTAT  against  which  statutory
     appeal is preferred. That  is  precisely  the  reason  that  all  these
     appeals were bunched together and collectively heard.
  2. At the outset, the controversy involved may be  reflected  by  pointing
     out that the questions for consideration are as to the  entitlement  of
     the Respondents/ assessees to Modvat/ Cenvat  Credit  for  the  use  of
     inputs in the manufacture of final products which are exempt or subject
     to nil rate of duty and the requirement of  the  assessee  to  maintain
     separate accounts with respect to inputs used in dutiable goods as well
     as exempted goods and the liability  arising  on  the  failure  of  the
     assessee to maintain such separate accounts. In Civil Appeal Nos. 8621-
     8630 of 2010, we are concerned with sulphuric acid. In Civil Appeal No.
     8631 of 2010, it is caustic soda  flakes  and  trichloro  ethylene.  In
     Civil Appeal No. 2337 of 2011, the product is again sulphuric acid  and
     in the case of Civil Appeal No. 5322 of 2010 and  the  other  connected
     matter of M/s Rallis India Ltd, it is Phosphoryl A  and  Phosphoryl  B.
     The issue is as to whether the Assessees (respondents) are entitled  to
     Modvat/ Cenvat  Credit  on  inputs  used  in  the  manufacture  of  the
     aforementioned  exempted  (or  subject  to  NIL  rate  of  duty)  final
     products.
  3. In all these appeals filed by the Revenue, it has  taken  the  position
     with the common contention as to whether the Respondents are liable  to
     pay 8% excise duty as an amount under Rule 57CC of the  Central  Excise
     Rules, 1944 or 57AD of the Central Excise Rules, 2000 or Rule 6 of  the
     Cenvat Credit Rules, 2004 (hereinafter referred to as 'Rules')  on  the
     value  of  by-product  namely  sulphuric  acid  which  was  cleared  to
     fertilizer plants under exemption in terms of the bonds executed by the
     fertilizer plants.
  4. At this stage we would describe the manufacturing process in all  three
     cases and the facts leading to the filing of the present appeal.


           Hindustan Zinc Ltd. (C.A. No. 8621-8630/2010)
           i)    Hindustan Zinc Ltd. obtained zinc ore concentrate from the
           mines on the payment of excise duty which is used  as  an  input
           for the production of zinc. Zinc ore is predominantly  available
           as Zinc Sulphide (ZnS).
           ii)   When ZnS is heated (calcined) at high temperature  in  the
           presence of oxygen, zinc oxide  (ZnO)  and  sulphuric  acid  are
           produced. Zinc  Oxide  is  further  oxidised  to  produce  zinc.
           Sulphur obtained as a technological necessity is a pollutant and
           is, therefore, converted into sulphur dioxide in the presence of
           catalysts  like  Vanadium  Pentaoxide   &   Hydrogen   Peroxide.
           Sulphuric acid is converted into sulphur and the respondent does
           not take  any  Cenvat  Credit  on  the  inputs  used  after  the
           emergence of sulphur dioxide. The sulphuric acid produced  as  a
           by-product  is  sold  on  payment  of  excise  duty  to  various
           industries. Some  quantities  of  sulphuric  acid  are  sold  to
           fertilizer plants in terms of notification No. 6/2002-CE on  the
           execution of bonds by the fertilizer plants to the  satisfaction
           of the excise authorities. The said sulphuric acid is  used  for
           the production of zinc.
           iii)  The excise department took a view that in terms of Rule 57
           CC of the  Rules,  the  respondents  were  obliged  to  maintain
           separate accounts  and  records  for  the  inputs  used  in  the
           production of zinc and sulphuric acid and in the absence of  the
           same the respondents were obliged to pay 8% as an amount on  the
           sale price of sulphuric acid to the fertilizer plants  in  terms
           of Rule 57 CC. The respondent defended the  more  by  contending
           that the very purpose of the grant  of  exemption  to  sulphuric
           acid was  to  keep  the  input  costs  at  the  lowest  for  the
           production  of  fertilizers    during   the   relevant   period.
           Fertilizers themselves were wholly exempted from the payment  of
           excise duty because the government wanted the farmgate price  to
           the farmer should be at the  lowest.  In  fact,  the  government
           grants subsidies to the fertilizer  plants  for  the  difference
           between the cost of production and sale price determined by  the
           government. It was their defence that any  duty  demand  on  the
           sulphuric  acid  will  defeat  the  very  purpose  of  grant  of
           exemption and make the fertilizer cost higher than the desirable
           level. In such a scenario, such higher  cost  will  have  to  be
           compensated by the government as subsidy.
           iv)   Respondent challenged the show  cause  notices  by  filing
           writ petitions under  Article  226  before  the  Rajasthan  High
           Court, primarily challenging the vires of  Rule  57  CC  on  the
           ground that the Central Government by  subordinate  legislation,
           can not fix rates of duties which  is  the  prerogative  of  the
           Parliament under Section 3 of the Central Excise Act, 1944  read
           with  Central  Excise  Tariff   Act,  1975.  Other   contentions
           regarding the vires of Rule  57  CC  were  also  raised.  As  an
           alternative, it was pleaded that even if Rule 57  CC  is  to  be
           held as intra vires, the demand raised in the show cause notices
           will not survive on proper interpretation of Rule  57CC  of  the
           Rules and hence is to be quashed. The  High  Court  decided  the
           petition in favour of the respondents on the  interpretation  of
           Rule 57CC and Rule 57D itself, without going into  the  question
           relating to the vires. Department is in appeal before this Court
           against this judgment.
           Birla Copper (C.A. NO. 2337/2011)
           i)    The manufacturing process of copper from  the  copper  ore
           concentrate is similar to that of  zinc  and  the  emergence  of
           sulphuric acid as a by-product was conceded  by  the  department
           before the Tribunal. Here again, Birla Copper were  selling  the
           by-product sulphuric acid to various industries  on  payment  of
           duties and clearing the sulphuric acid without payment  of  duty
           to the fertilizer plant based  on  the  bonds  executed  by  the
           fertilizer plants. The Tribunal in this case decided the  matter
           in favour of the respondent following its own  judgment  in  the
           case of Sterlite Industries India Ltd. v. CCE reported  as  2005
           (191) ELT 401. In that case Sterlite was also a manufacturer  of
           copper and a competitor for Birla Copper using the same  process
           and the Tribunal held that excise duty was not payable under  57
           CC on the sulphuric acid cleared to fertiliser plants in view of
           this court's decision in the case of Swadeshi  Polytex  Ltd.  v.
           CCE reported as 1989 (44) ELT 794. The Tribunal also in the case
           of Sterlite (supra) held that 57 CC will apply  only  when  same
           inputs are being used  in  manufacture  of  two  or  more  final
           products, one of which is exempt from payment of excise duty and
           the assessee was not maintaining separate account  and  separate
           inventory. In this case, the Tribunal held that  sulphuric  acid
           was not a final product but only a by-product and hence Rule  57
           CC will not apply, particularly when we read  the  same  in  the
           light of Rule 57D. Department's appeal is against this order  of
           the Tribunal. Significantly, the department has not disputed the
           emergence of  sulphuric  acid  as  a  by-product.  We  are  also
           informed that the Department did not file any appeal challenging
           the decision of Sterlite (supra) and the same has been  accepted
           by the Department. In the present appeal, the contention of  the
           Department is that the  Sterlite  (supra)  will  apply  for  the
           period prior to 1.4.2000 when Rule 57 D was in  force  and  post
           1.4.2000, the Rule was deleted.
           Rallis India Ltd. (C.A. No. 5322/2010)
        i) Rallis India is engaged in the manufacture of Gelatin for use in
           pharmaceutical industry for manufacture of capsules. Gelatin  is
           produced by reacting Hydrochloric Acid with bovine animal bones.
           During the reaction, the bone converts into ossein which in turn
           is used  to  produce  gelatin.  The  inorganic  substances  like
           phosphorous etc. are washed with water which  is  called  mother
           liquor, spent  liquor  or  phosphoral  liquor.  When  these  by-
           products and waste products are cleared without payment of duty,
           the Excise Department demanded duty @ 8% in terms of Rule 57 CC.
           Here again, whether the mother liquor is a waste product or  by-
           product was not disputed by the Department before  the  Tribunal
           or before the Bombay High Court. The Tribunal decided the matter
           against the assessee by interpretating Rule 57 CC. The same  was
           challenged before the Bombay High Court, which has reversed  the
           decision of the Tribunal. The Department is  in  appeal  against
           the decision of the High Court.
     The aforesaid narration discloses the identity of  the  issue  in  the
     three set of appeals. Henceforth, in our discussion,  reference  would
     be to the Hindustan Zinc Ltd., as the respondent.
  5.  The  respondent  herein  is  a  Public  Limited  Company  and  it  was
     disinvested  in  April,  2002.  The  respondent  is  engaged   in   the
     manufacture of non-ferrous metals like zinc, lead as well as  Sulphuric
     Acid and Copper  Sulphate.  The  said  products  are  chargeable  under
     Chapter Sub-heading No. 2807.00, 7901.10 and  2833.10  respectively  of
     the First Schedule to the Central Excise Tariff Act, 1985  respectively
     among their other products. A show cause notice was issued on 15.3.2005
     to the assessee respondent for recovery of Rs. 48,39,883/-  under  Rule
     12 of the erstwhile CENVAT Credit Rules, 2002 and  Rule  14  of  CENVAT
     Credit Rules 2004 read with Section 11(e) of the  Central  Excise  Act,
     1944 along with interest and penal provisions.
  6. The respondent filed Writ Petition No. 6776 of  2005  before  the  High
     Court, Jodhpur challenging the constitutional validity of Rule 6 of the
     Cenvat Credit Rules, 2004 as well as the  impugned  show  cause  notice
     dated 15.3.2005. The respondent submitted in  the  said  writ  petition
     that Sulphur Dioxide Gas is produced during the manufacture of Zinc and
     lead and due to environmental control requirements, they are prohibited
     from releasing the same in the air. Therefore, Sulphur Dioxide is  used
     for manufacture of Sulphuric Acid which is the input for manufacture of
     non-ferrous metals like zinc and lead cannot be  considered  as  common
     inputs for manufacture of Sulphuric Acid in as much as Sulphur  is  the
     only component in concentrate which goes into manufacture of  Sulphuric
     Acid. Further, the respondent contended  that  Rule  6  of  the  Cenvat
     Credit Rules is beyond the power of Central Government and hence  ultra
     vires the provisions of the Act. The constitutional  validity  of  Rule
     57CC of the erstwhile Modvat Credit Rules was also challenged.  It  was
     stated that the Tribunal in the judgment in the matter of  Binani  Zinc
     Ltd. v. Commissioner of Central Excise, Cochin – 2005 (187) E.L.T.  390
     (Tri. - Bang.) has held that Rule 57CC does not  make  any  distinction
     between exempted final product and exempted bye-product and  hence,  no
     useful purpose would be served by approaching the Tribunal.
  7. The appellant contested the  said  Writ  Petition  by  way  of  counter
     affidavit in which  the  appellant  submitted  that  the  respondent  -
     assessee was not maintaining separate inventory  and  account  for  the
     receipt and use of inputs in relation the manufacture of final  product
     i.e. Sulphuric Acid cleared at Nil rate of duty as required in terms of
     provisions of Rule 6(2) of the Rules. That it was mandatory  to  follow
     the provisions of  the  Rules  if  common  inputs  were  used  for  the
     manufacture of dutiable final product and exempted goods. It  was  also
     contended that assuming without admitting that Sulphuric  Acid  is  by-
     product, it was mandatory to reverse an amount equal to 8% of the value
     of exempted goods as the words used in the provisions of Rule 6 of  the
     Rules “is exempted goods and not exempted final  product”.  By  way  of
     preliminary submission, it was pleaded that the Writ Petition  is  pre-
     mature and the assessee had not even replied to the show cause notice.
  8. The High Court after examining the manufacturing  process  as  well  as
     Rule position, came to the conclusion that prohibition against claiming
     Modvat Credit on exempted goods or subject to nil rate of duty  applies
     in case where such exemption from payment of duty or nil rate  of  duty
     on end product is predictably known at the time the recipient of inputs
     is entitled to take credit of duties paid on such inputs. The fact that
     due to subsequent notification or on  contingency  that  may  arise  in
     future, the end product is cleared  without  payment  of  duty  due  to
     exemption or nil rate of duty does not affect the  availing  of  modvat
     credit on the date of entitlement. If on the date of entitlement, there
     is no illegality or invalidity in taking credit of such modvat/  Cenvat
     Credit, the right to  utilize  such  credit  against  future  liability
     towards duty become indefeasible and is not liable to  be  reversed  in
     the contingency discussed above.
  9. On these findings, the High Court has allowed the Writ Petitions  filed
     by the respondent-Hindustan Zinc. In the process there  is  a  detailed
     discussion of  the  relevant  rules  explaining  the  scheme  contained
     therein; on the aspect of payment of 8% excise duty under Rule 57 CC of
     Central Excise Rules, 1944, 57AD of the Central Excise Rules, 2000  and
     Rule 6 of the Cenvat Credit Rules, 2004.
 10. From the aforesaid narration, it becomes apparent that  the  respondent
     wants to avail Modvat Credit on duties paid on inputs used  at  smelter
     by it vis-a-vis the part of  sulphuric  acid  produced  by  it  in  its
     sulphuric acid plant and sold to IFFCO, a manufacturer  of  fertilizer,
     who is entitled to avail concession of acquiring sulphuric acid used by
     it as an input in manufacture of fertilizers on payment  of  duties  in
     terms of the exemption notifications issued from time to time.  So  far
     as the sulphuric acid is concerned, as an end product it is  chargeable
     to duty under tariff head 28. The  rate  of  duty  provided  under  the
     Tariff Act is 16% ad velourm. There is no  exemption  as  such  to  the
     manufacture from the payment of duty on manufacture of  sulphuric  acid
     when removed. Under general exemption No. 66 issued under sub-section 1
     of Section 5A of the Central Excise  Act  the  Central  Government  has
     exempted exciseable goods of the description specified in  (3)  of  the
     table appended to the said Exemption Order.
 11. In so far as sulphuric  acid  which  is  used  in  the  manufacture  of
     fertilizers  is  concerned,  nil  duty  is  provided.  However,   table
     indicates that it is subject to condition No. 5.  Condition  No.  5  is
     mentioned in Annexure appended to General Exemption No. 66 which  reads
     as under:-
           “5.   Where such  use  is  elsewhere  than  in  the  factory  of
           production the exemption shall be allowed if the procedure  laid
           down in the Central Excise (Removal  of  Goods  at  Concessional
           Rate of Duty for manufacture of Excisable goods) Rules, 2001, is
           allowed.”


 12. The appellant contends that clearance of sulphuric acid as a by-product
     to fertilizer plants attract nil rate of duty in terms of  notification
     no. 6/2002-CE, though on the basis of bonds posted  by  the  fertilizer
     plants, but nonetheless, the goods are cleared under total exemption or
     nil rate of duty and hence 57CC is attracted. It  is  their  contention
     that Rule 57 D has no application.
 13. Since the answer depends on  the  question  as  to  whether  Rule  57CC
     applies  or  Rule  57D  is  attracted,  as  well  as  on  the   correct
     interpretation of these  Rules,  we  reproduce  these  rules,  at  this
     juncture:-
           Rule 57CC -
           “Adjustment of credit on inputs used in exempted final  products
           or maintenance of separate inventory and accounts of  inputs  by
           the manufacturer, (1) Where a manufacturer  is  engaged  in  the
           manufacture of any final product which is chargeable to duty  as
           well as in any other final product  which  is  exempt  from  the
           whole of the duty of excise leviable there on or  is  chargeable
           to nil rate of duty and the manufacturer  takes  credit  of  the
           specified duty on any inputs (other than inputs  used  as  fuel)
           which is used as ordinarily  used  in  or  in  relation  to  the
           manufacture of both the aforesaid categories of final  products,
           whether directly or indirectly and whether contained in the said
           final  products  or  not,  the  manufacture  shall,  unless  the
           provisions of sub-rule (9) are  complied  with,  pay  an  amount
           equal to 8% of the price (excluding sales tax and  other  taxes,
           if any, payable on such goods) of the second category  of  final
           products charged by the manufacturer for the sale of such  goods
           at the time of their clearance from the factory.


           The amount  mentioned  in  sub-rule(1)  shall  be  paid  by  the
           manufacturers by adjustment in  the  credit  account  maintained
           under sub-Rule(7) of Rule 57G  or  in  the  accounts  maintained
           under Rule 9 or sub-Rule 173G and  if  such  adjustment  is  not
           possible for any reason, the amount shall be paid in cash by the
           manufacturer availing of credit under Rule 57A.


           The provisions of sub-rule(1) shall not apply to final  products
           falling under Chapter 50 to 63 of the Schedule  to  the  Central
           Excise Tariff Act, 1985 (5 of 1986).


           (4)   The provisions of sub-rule (1) shall also not apply to-
                (a)    Articles of plastics falling within Chapter 39;
                (b)    Tyres of a kind used  on  animal  drawn  vehicles  or
                handcarts and their tubes, falling within Chapter 40;
                (c)    Black  and  white  television  sets,  falling  within
                Chapter 85 and
                (d)    News  print,  in  rools  or  sheets,  falling  within
                Chapter heading No. 48.01; which are exempt from  the  whole
                of the duty of excise leviable thereon or chargeable to  nil
                rate duty.


           (5)   In the case of final products referred to in sub rule  (3)
           or sub-rule(4) and excluded from the provisions of  sub-rule(1),
           the manufacturer shall pay an amount equivalent to the credit of
           duty attributable to inputs contained in such final products  at
           the time of their clearance from the factory.
           The provisions of sub-rule (1) shall also  not  apply  to  final
           products  which  are  exported  under  bond  in  terms  of   the
           provisions of Rule 13.


           The provisions of sub-rule (1) shall apply even if the inputs on
           which credit has been taken are not actually used  or  contained
           in any particular clearance of final products.


           If any goods are not sold by the  manufacturer  at  the  factory
           gate but are sold from  a  depot  or  from  the  premises  of  a
           consignment  agent  or  from  any  other  premises,  the   price
           (excluding sales tax and other taxes, if any, payable) at  which
           such goods are ordinarily sold  by  the  manufacture  from  such
           depot or from the premises of a consignment agent  or  from  any
           other premises shall be deemed to be the price for  the  purpose
           of sub-Rule (1).


           In respect of inputs (other than inputs used as flue) which  are
           used in or in relation to the manufacturer of any  goods,  which
           are exempt from the whole of the duty of excise leviable thereon
           or chargeable to  nil  rate  of  duty,  the  manufacturer  shall
           maintain separate inventory and accounts of the receipt and  use
           of inputs for the aforesaid purpose and shall not take credit of
           the specified duty paid on such inputs.”




           Rule 57D -


           “Credit  of  duty  not  to  be  denied  or  varied  in   certain
           circumstances – (1)    Credit of specified  duty  shall  not  be
           denied or varied on the  ground  that  part  of  the  inputs  is
           contained in any waste, refuse or by-product arising during  the
           manufacture of the final product, or that the inputs have become
           waste during the course of manufacture  of  the  final  product,
           whether or not such waste or refuse or by-product is exempt from
           the whole of the duty of excise leviable thereon  or  chargeable
           to nil rate of duty or is not specified as a final product under
           Rule 57A.”


 14. Mr. Parasaran, the learned Solicitor General, opened his submissions by
     challenging the very approach of the High  Court  in  entertaining  the
     writ petitions as according to him, stage therefor had not ripened. His
     contention in this behalf was that  merely  a  show  cause  notice  was
     issued and no final decision was taken on the said show  cause  notice.
     However, instead of showing cause, writ petitions  were  filed  seeking
     quashing of the show cause notice which should have been  dismissed  as
     premature. He referred to certain judgments  of  this  court  as  well,
     wherein it is held that High Court,   normally,  should  not  entertain
     writ petition questioning the validity of the show cause notice.
 15. On merits, the learned Solicitor General argued that the interpretation
     furnished by the High Court to Rule 57CC of the Modvat Rules and Rule 6
     of CENVAT Rules, respectively was  not  correct.  The  High  Court  was
     required to apply literal rule of interpretation when the  language  of
     these rules is clear and unambiguous.
 16. Before we advert to the interpretations of the aforesaid provisions and
     to discuss the argument of the Union of India  as  to  whether  literal
     interpretation is to be given to Rule 57CC, it would  be  necessary  to
     understand the properties of sulphuric acid.  From  what  is  explained
     above including the use of sulphuric acid for the production  of  zinc,
     it becomes apparent that sulphuric acid  is  indeed  a  by-product.  In
     fact, it is so treated by the respondents in  their  balance  sheet  as
     well as various other documents which were filed by the respondents  in
     the courts below. It  is  also  a  common  case  of  the  parties  that
     Hindustan Zinc Limited and Birla Copper  were  established  to  produce
     zinc and copper respectively and not for the  production  of  sulphuric
     acid. It was argued by the learned Counsel for the  respondents,  which
     could not be disputed by the learned Solicitor General, that  emergence
     of sulphur dioxide in the calcination process of concentrated ore is  a
     technological necessity and then conversion of the same into  sulphuric
     acid as a non-polluting measure cannot elevate the  sulphuric  acid  to
     the status of  final  product.  Technologically,  commercially  and  in
     common  parlance,  sulphuric  acid  is  treated  as  a  by-product   in
     extraction of non-ferrous metals by companies not only in India but all
     over the world. That is the reason  why  the  department  accepted  the
     position before the Tribunal that sulphuric acid is a by-product.
 17. In these circumstances the position taken now  by  the  appellant  that
     sulphuric  acid  cannot  be  treated  as   a   by-product   cannot   be
     countenanced. Mr. S.K. Bagaria, learned Senior  Counsel  appearing  for
     the respondent while explaining the manufacturing  process  in  detail,
     also pointed out  that  the  ore  concentrates  (Zinc  or  Copper)  are
     completely utilised for the production of zinc and copper and  no  part
     of the metal, zinc or copper forms part of the sulphuric acid which  is
     cleared out. It was submitted that the extraction of zinc from the  ore
     concentrate will inevitably result in the emergence of sulphur  dioxide
     as a technological necessity. It is not as though the  Respondents  can
     use lesser quantity of zinc concentrate only to produce the  metal  and
     not produce sulphur dioxide. In other words, a given quantity  of  zinc
     concentrate will result in  emergence  of  zinc  sulphide  and  sulphur
     dioxide according to the chemical formula on which respondents have  no
     control.
 18. On these facts this court is inclined to  accept  the  version  of  the
     respondents that the ore concentrate  is  completely  consumed  in  the
     extraction of zinc and  no  part  of  the  metal  is  forming  part  of
     sulphuric acid.
 19. Once we proceed keeping in mind the  aforesaid  factual,  technological
     and commercial position available on the records, it has to be accepted
     that  the  respondents  have  consumed  the  entire  quantity  of  zinc
     concentrate in the production of zinc.
 20. Let us now examine  the  position  contained  in  Rule  57  CC  on  the
     touchstone of the aforesaid position. No doubt, Rule 57CC  requires  an
     assessee to maintain separate records for inputs which are used in  the
     manufacture of two or more final products one of which is dutiable  and
     the other is non-dutiable. In that event, Rule 57 CC  will  apply.  For
     example, a tyre manufacturer manufactures different kinds of tyres, one
     or more of which were exempt like tyre used in animal carts  and  cycle
     tyre, where car tyres and truck tyres attract excise duty. The  rubber,
     the accelerators, the  retarders,  the  fillers,  sulphur,  vulcanising
     agents which are used in production of tyres are indeed common to  both
     dutiable and exempt tyres.  Such  assesses  are  mandated  to  maintain
     separate records to avoid the duty demand of 8% on exempted tyres.  But
     when we find that in the case of the respondents, it is not  as  though
     some quantity of zinc ore concentrate has gone into the  production  of
     sulphuric acid, applicability of  Rule  57  CC  can  be  attracted.  As
     pointed out above, the entire quantity of zinc has indeed been used  in
     the production of zinc and no part can be traced in the sulphuric acid.
     It is for this reason, the respondents maintained the inventory of zinc
     concentrate for the production of zinc and we agree with the submission
     of the respondents that  there  was  no  necessity  and  indeed  it  is
     impossible, to maintain separate records for zinc concentrate  used  in
     the production of sulphuric acid. We, therefore, agree  with  the  High
     Court that the requirements of 57CC were fully met in the way in  which
     the Respondent was maintaining records and inventory and  the  mischief
     of recovery of 8% under Rule 57 CC on exempted sulphuric  acid  is  not
     attracted.
 21. As already pointed out, argument of the learned Solicitor  General  was
     that Rule 57CC and Rule 6 of  the  Modvat/  CENVAT  Rules  respectively
     require the literal rule of interpretation which needs to  be  applied,
     as the language of these was unambiguous in this behalf. We may  record
     that as per the learned Solicitor General, the provisions of Rule  57CC
     or Rule 6 envisage common use of inputs in two final products i.e.  one
     dutiable and other exempted from the  applicability  of  the  same.  He
     submitted that when two final products emerge  out  of  use  of  common
     inputs, one excisable and the other exempt, the provisions will  apply.
     The question of intention of the assessee to manufacture  the  exempted
     product is not relevant. It may be intended or unintended but  if  what
     results in the course of a manufacturing process is a  “final  product”
     falling within the meaning of the said provisions, the provisions  will
     apply in full with the attendant consequences. He also argued that Rule
     57D uses the words 'waste and refuse' alongwith “by-products”. The word
     'by-product' will necessarily have to take its colour and meaning  from
     the accompanying words “waste and refuse”. “By-products” cannot, in any
     event, mean “final products”. This Rule only means that  Modvat  Credit
     cannot be denied on the ground that in the course of  manufacture,  non
     excisable goods also arise.
 22. Elaborating this contention, the learned  Solicitor  General  submitted
     that the words “final products” in the context  of  Modvat  and  Cenvat
     Credit have to be understood giving the meaning as assigned  to  it  in
     the  Modvat/  Cenvat  Rules.  Rule  57A  inter  alia  states  that  the
     provisions of this Section shall  apply  to  such  finalised  excisable
     goods (referred to in that section as final products). Again, Rule 2(c)
     of the Cenvat Credit Rules, 2002 defines “final  products”  as  meaning
     excisable goods manufactured or produced from  inputs  except  matches.
     Rule 2(h) of the Cenvat Credit Rules, 2004 defines “final products”  as
     meaning excisable goods manufactured or produced from input,  or  using
     in input service. Thus, final products referred  to  in  the  aforesaid
     provisions  can  only  mean  to  be   excisable   goods   produced   or
     manufactured. In the present set of cases, sulphuric acid, caustic soda
     flakes, trichloro ethylene  and  Phosphoryl  A  and  Phosphoryl  B  are
     excisable goods  manufactured  and  produced  in  India  falling  under
     different headings of the Central Excise Tariff Act. The submission was
     that if these products are exempt or subject to NIL rate of duty,  then
     the inputs on which Modvat/ Cenvat  Credit  are  claimed  used  in  the
     manufacture of the aforesaid final products will attract the  rigor  of
     Rule 57CC/ Rule 6 of the Modvat/ Cenvat Credit Rules.
 23. In this very direction, his further submission was that the  term  “by-
     products” is not defined either in the Act or in the Rules.  Dictionary
     meanings cannot be resorted to in this case as it would then mean  that
     final products would be treated  as  by-products  defeating  the  plain
     language of Rule  57CC  and  Rule  6  which  are  applicable  to  final
     products. The only test  is  “excisability  of  goods  manufactured  or
     produced” and only if the requirements of this test are satisfied,  the
     goods can be 'final products' and never 'by-products'. On  this  basis,
     the learned Solicitor General submitted that  even  an  admission  made
     before the Tribunal in the Birla Copper case of the goods being a  'by-
     product', cannot be relied on by the respondent.
 24. While pleading that the aforesaid  interpretation  to  these  Rules  be
     accepted by this Court, submission of Mr. Parasaran was that in such an
     eventuality the judgment in the case of Swadeshi Polytex Ltd.  v.  CCE;
     1989 (44) ELT 794 was not applicable, nor was the judgment  in  CCE  v.
     Gas Authority of India Ltd.; 2008 (232) ELT 7 relied upon  the  by  the
     respondent. Likewise his submission was that  judgment  of  the  Bombay
     High Court in the case of Rallis India Ltd. v.  Union  of  India;  2009
     (233) ELT 301 was erroneous wherein  view  taken  is  contrary  to  the
     aforesaid submission.
 25. These arguments may seem to be attractive. However,  having  regard  to
     the processes involved,  which  is  already  explained  above  and  the
     reasons afforded by us, we express our inability  to  be  persuaded  by
     these submissions. We have already noticed above that in  the  case  of
     Birla Copper (C.A. No. 2337 of  2011)  the  Tribunal  has  decided  the
     matter following the judgment in the case of Swadeshi Limited  (supra).
     In that case, Ethylene Glycol was reacted with DMT to produce polyester
     and ethanol. Methanol was  not  excisable  while  Polyester  Fibre  was
     liable to excise duty. Credit was taken of duty paid on ethylene glycol
     wholly for the payment of duty on  polyester.  The  department  took  a
     position that Ethylene Glycol was used in the  production  of  Methanol
     and proportionate credit taken on ethylene glycol was to  be  reversed.
     This Court ruled that the emergence of  Methanol  was  a  technological
     necessity and no part of ethylene glycol could be  said  to  have  been
     used in production of Methanol and indeed it was held  that  the  total
     quantity of ethylene glycol was used for the production  of  polyester.
     The fact in all these three appeals appear to be identical to the facts
     and the law laid down in  Swadeshi  Polytex  (supra).  Therefore,  this
     judgment is squarely applicable.
 26. Furthermore, the provisions of Rule 57CC cannot be read  in  isolation.
     In order to understand the scheme of Modvat Credit  contained  in  this
     Rule, a combined reading of Rule 57A, 57B and 57D alongwith  Rule  57CC
     becomes inevitable. We have already reproduced Rule 57D above.  It  can
     be easily discerned from a combined reading of the aforesaid provisions
     that the terms  used  are  'inputs',  'final  products',  'by-product',
     'waste products' etc. We are of the opinion that these terms have  been
     used taking into account commercial reality in trade. In  that  context
     when we scan through Rule 57  CC,  reference  to  final  product  being
     manufactured with the same common inputs becomes  understandable.  This
     Rule did not talk about emergence of final product and a by-product and
     still said that Rule 57 CC will apply. The  appellant  seeks  to  apply
     Rule 57CC when Rule 57D does not talk about application of Rule 57CC to
     final  product  and  by-product  when  the  by-product  emerged  as   a
     technological necessity. Accepting the argument of the appellant  would
     amount to equating by-product and final  product  thereby  obliterating
     the  difference  though   recognised   by   the   legislation   itself.
     Significantly this interpretation by the Tribunal in  Sterlite  (supra)
     was not appealed against by the department.
 27. We are also  unable  to  agree  with  the  submission  of  the  learned
     Secretary General that judgment  in  GAIL's  Case  is  not  applicable.
     Significantly, the question as to whether Rule 57 CC will apply when by-
     products are cleared without payment of duty  came  for  discussion  in
     that case. It was held that so long as the lean gas was obtained  as  a
     by-product and not as a final product, Rule 57 CC will  not  apply.  We
     are, therefore, of the view that  the  respondent's  case  is  squarely
     covered by the judgment in GAIL's case.
 28. At the stage we should deal with the argument of non maintainability of
     the writ petition filed by  Hindustan  Zinc  Limited  before  the  High
     Court. No doubt, it had  filed  writ  petition  at  show  cause  stage.
     However, it was not merely the validity of show cause notice which  was
     questioned. In the writ petition even the vires  of  Rule  57  CC  were
     challenged. That was a reason because of which the writ petitions  were
     entertained, and rightly so,  it  is  a  different  matter  that  while
     interpreting the rule, the High Court chose to read down the said  rule
     and to give an interpretation which would save  it  from  the  vice  of
     unconstitutionality. Moreover, other  statutory  appeal  filed  by  the
     Department  is  against  the  order  of  CESTAT,  which  involves  same
     question. Matter is argued in appeal before us also at  length  and  we
     are deciding the same on merits. For all these reasons the argument  of
     alternate remedy has to be discarded.
 29. As a result of aforesaid discussion, we find no merit in these  appeals
     and dismiss the same with costs.




                                       …..................................J.
                                                              [Anil R. Dave]






                                       …..................................J.
                                                                [A.K. Sikri]




     New Delhi
     May 06, 2014

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.