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2005 DIGILAW 1596 (RAJ)

Union of India v. Hindustan Zinc Ltd.

2005-05-30

DINESH MAHESHWARI, RAJESH BALIA

body2005
Judgment Rajesh Balia, J.-This appeal has been filed under Section 35-G of the Central Excise Act, 1944. The following substantial question of law was framed by the Court at the time of admission:- Whether in the facts and circumstances of the case, the Tribunal was justified in coming to the conclusion that respondent could avail the MODVAT Credit on input namely, light diesel oil to the extent its use is referable to production of by-product Sulpher di-oxide used in manufacture of Sulphuric Acid when the Sulphuric Acid is a commodity which is exempted from Excise Duty? 2. The dispute relates to the period upto 31st August, 1996 about availing MODVAT credit on the light diesel oil used as fuel for generating power by the respondent assessee in its smelter plant. 3. In its smelter plant, as a result of by-product of smelter processing, Sulphur-Dioxide Gas is released which is of hazardous nature and as per the pollution control norms, the assessee has to regulate it within the factory and he was not permitted to vent it outside the precincts of the factory. This Sulphur Dioxide is transmitted to another plant, where the gas received in the plant is treated under the required temperature i.e. 400 to 450 degree which resulted into manufacture of Sulphuric Acid and the Sulphuric Acid unit is exempted from the levy of Excise Duty. 4. The Assessee has claimed the MODVAT credit on the light diesel oil received in the smelter factory premises at the time of receipt and used in the smelter factory premises where the smelter plant is situated. 5. The Commissioner of Central Excise, Jaipur was of the opinion that the assessee was not entitled to avail the MODVAT credit on use of light diesel oil to the extent it related to the product directly or indirectly which is exempted from Duty, in terms of Rule 57-C as was in existence until 3rd August, 1996 and to that extent the assessee has wrongfully availed the MODVAT credit. He, therefore, issued a show-cause notice which resulted in final order dated 19.09.2001. He, therefore, issued a show-cause notice which resulted in final order dated 19.09.2001. The Commissioner relied on the fact that the assessee was maintaining separate account of light diesel oil for the purpose of costing its product, bifurcated the user of light diesel oil on the basis of its accounts of costing and to that extent, the MODVAT credit was ordered to be withdrawn and finally ordered the recovery of amount of Rs. 19,86,365/-being the credit referable to Duty payable on LDO indirectly used in manufacture of Sulphuric Acid relying on Rule 57(1) and also ordered to realize penalty under Section 47 (1) (vi) of the Central Excise Act. 6. Aggrieved with the aforesaid order, the assessee appealed before the Customs, Excise and Service Tax Appellate Tribunal, New Delhi which was decided by the Tribunal and on 12th February, 2004. The Tribunal allowed the appeal of the assessee by holding that the Sulphar Dioxide gas is nothing but by-product in the process of manufacture of zinc/lead. Rule 57-D of the Central Excise Rules, at the relevant time, provided that the credit of specified duty "shall not be denied or varied on the ground that part of inputs is contained in any waste, refuse, or by-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 exempted 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 57-A. Thus, relying on the said provisions, the Tribunal was of the opinion that the Sulphuric Acid being a bye-product, the MODVAT credit availed on inputs in the main product could not be withdrawn by referring its utilisation to the by-product. 7. In view of this, the Tribunal was further of the opinion that since the Sulphuric Acid is prepared by use of Sulphar Dioxide, it cannot be said that any part of the inputs i.e., LDO has gone into manufacture of Sulphuric Acid. For the purpose of applying the provisions of Rule 57-C of the Central Excise Rules, 1944, it is pre-requisite that the inputs are used in the manufacture of products, which are exempted from the whole of the duty of Excise or is chargeable to nil rate of duty. For the purpose of applying the provisions of Rule 57-C of the Central Excise Rules, 1944, it is pre-requisite that the inputs are used in the manufacture of products, which are exempted from the whole of the duty of Excise or is chargeable to nil rate of duty. The mere fact of raising Sulphar Dioxide for making Sulphuric Acid will not tantamount to using the inputs on which MODVAT credit is availed in the manufacture of exempted products i.e., Sulphuric Acid. In coming to this conclusion, the Tribunal relied on its earlier decision referred to in the order. 8. The learned Counsel appearing for the Revenue has relied on Rule 57-C of the Central Excise Rules for urging that the MODVAT credit could not have been availed by the assessee to the extent use of LDO was related to manufacture of Sulphuric Acid as per the process noticed by the Tribunal and the Commissioner, and in view of Section 57-C which prohibits taking of MODVAT credit of specified duty on the inputs used in or in relation to manufactured of bye-product directly or indirectly whether it is final product or not. 9. On the other hand, the learned Counsel for the respondent relied on Rule 57-D as well as Rule 57-C (2) to urge that the assessee has rightly availed MODVAT credit on light diesel oil, during the period it was permitted to be availed as an input in the manufacturing process at smelter plant whether the case is taken under Clause (1) or Clause (2) to the Rule 57-C. 10. It may be profitable to reproduce both the clauses. It may be profitable to reproduce both the clauses. Rule 57-C as it was existing before it was substituted in different form vide notification No. 25/26-CE dated 31st August, 1996 reads as under:-57-C. Credit of duty not to be allowed if final products are exempt.-(1) No credit of specified duty paid on the inputs used in or in relation to the manufacture of a final product whether directly or indirectly and whether contained in the final product or not [other than those cleared either to a unit in a Free Trade Zone or to a hundred percent Export Oriented Unit or to a unit in an Electronic Hardware Technology Park or Software Technology Parks or supplied to the United Nations or an international organisation for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue] No. 108/95-Central Excise, dated 28th August, 1995) shall be allowed if the final product is exempt from the whole of the duty of excise leviable thereon or is chargeable to nil rate of duty. (2) Where a manufacturer avails of the credit of specified duty on any inputs and is engaged in the manufacture of any final products which is chargeable to duty as well as in the manufacture of any other final product which is exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty in the same factory, the provisions of Sub-rule (1) shall be deemed to be satisfied only when the manufacturer follows the procedure prescribed in Sub-rule (1) of Rule 57-C or the provisions of Sub-rule (2) of that rule are complied with; Provided that nothing contained in this sub-rule shall apply to inputs intended to be used as fuel. 11. 11. Rule 57-D as it existed prior to 1st August, 1996 reads as under:-Rule 57-D. Credit of duty not to be denied or varied in certain cricumstnaces.--(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 57-A. (2) Credit of specified duty allowed in respect of any inputs shall not be denied or varied on the ground that any intermediate products have come into existence during the course of manufacture of final products or such inputs are used in the manufacture of capital goods as defined in Rule 57-Q and that such intermediate products or capital goods, as the case may be, are for the time being exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty: Provided that such intermediate products are used within the factory of production in the manufacture of a final product (other than those cleared either to a unit in a free trade zone, or to a hundred per cent Export-Oriented Unit or to a unit in an Electronic Hardware Technology Park or to a unit in Software Technology Parks) on which the duty of excise is leviable whether in whole or in parts. Provided further that such intermediate products are specified as inputs or as final products under a notification used under Rule 57-A: Provided also that the credit of specified duty shall be allowed in respect of inputs which are used for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production. 12. The third proviso gives a complete quietus to issue about withdrawal of MODVAT credit on inputs used for generation of electricity. The Rule specifically prohibits denial or varying of MODVAT credit in case of inputs used in generation of electricity. 13. 12. The third proviso gives a complete quietus to issue about withdrawal of MODVAT credit on inputs used for generation of electricity. The Rule specifically prohibits denial or varying of MODVAT credit in case of inputs used in generation of electricity. 13. The findings of fact recorded by the Tribunal show that the Sulphuric Acid is not produced in the smelter plant in which the smelter plant is situated and where the sulphuric acid gas is taken by the assessee to be used as per the Pollution Control norms. It is not the case of the Revenue and now there is no dispute about it that on the manufacture of Sulphar Dioxide which is admittedly, a by-product of the assessee of manufacture in smelter of its goods, does not result in withdrawal of MODVAT on light diesel oil. Therefore, there is no dispute also that so far as the Sulfuric Acid is concerned, it is not final product of the smelter plant. 14. Firstly, we may examine that the by-product of smelter that is Sulphar Dioxide. If it is considered to be an independent product, Rule 57-C classifies the applicability of provisions to two classes where the product is arrived at in the same factory and in other cases. Sub-rule (2) of Rule 57-C governs the cases in which the manufacture of final product comes within the same factory and such final product is exempted from payment of duty. If the two plants are taken to be separate, Rule 57-C(1) would come into operations. Apparently, the final product of the factory where the smelter process is going, remains Sulphar dioxide gas. It is not the contention of either of the parties that production of Sulphar Dioxide is exempted from Excise Duty or chargeable to nil rate of Duty. Hence, MODVAT credit availed on LDO cannot be withdrawn under Rule 57-C (1). Moreover, it is specifically governed by Rule 57D. On outcome of by-product only the MODVAT credit availed on the principal manufacture process is not to be denied. In that situation, no exception can be taken by the Tribunal that Rule 57-C(1) does not apply for withdrawal of MODVAT credit for bye-products. If it is taken to be the case of manufacturing of Sulphuric Acid, the exempted goods in the same factory though at two different places as contended by learned Counsel for the Revenue, Sub-rule (2) come into operation. If it is taken to be the case of manufacturing of Sulphuric Acid, the exempted goods in the same factory though at two different places as contended by learned Counsel for the Revenue, Sub-rule (2) come into operation. Sub-rule (2) clearly postulates that this prohibition on availing MODVAT of the end product is exempted is not applicable to MODVAT availed on fuel. The proviso to Sub-rule (2) makes it abundantly clear beyond any doubt that where input is intended to be used as a fuel, notwithstanding the end product is exempted from payment of duty, still MODVAT credit on the input used as fuel is not to be withdrawn. This position has been retained in Rule 57-C which has been inserted w.e.f. 1st September, 1996 under which Sub-rule (3) also envisages that restrictions on availing MODVAT on inputs used in relation to manufacture of an end product which is exempted from payment of Duty or attracts Nil rate of Duty, is not extended to fuel used as input. It is not in contention that LDO is an input used as fuel only. Hence, no withdrawal of MODVAT credit availed on LDO could take place if Sub-rule (2) of Rule 57C is applicable. 15. Thus, in either case, withdrawal of MODVAT credit availed on LDO to the extent it relates to manufacture of Sulphuric Acid is concerned, was not permissible. 16. This being the clear position, In our opinion, no interference is called for in the order of the Tribunal. 17. The appeal fails and is hereby dismissed. No order as to costs.