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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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