UNION OF INDIA Vs M/S HINDUSTAN ZINC LTD.
Bench: ANIL R. DAVE,A.K. SIKRI
Case number: C.A. No.-008621-008621 / 2010
Diary number: 815 / 2008
Advocates: B. V. BALARAM DAS Vs
M. P. DEVANATH
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C.A. NO. 8621 of 2010
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 1
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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
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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)
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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-
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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.”
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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.
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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.
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…..................................J. [Anil R. Dave]
…..................................J. [A.K. Sikri]
New Delhi May 06, 2014
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