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
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
