1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR JUDGMENT 1. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.6776/2005 2. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.6784/2005 3. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.6785/2005 4. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.6786/2005 5. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.6787/2005 6. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.6788/2005 7. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.6789/2005 8. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.220/2006 9. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.6698/2005 10. Hindustan Zinc Ltd. Vs. UOI & Ors. D.B. CIVIL WRIT PETITION NO.364/2007 Date of judgment : 23rd January, 2007 PRESENT HON'BLE MR. JUSTICE RAJESH BALIA HON'BLE MR. JUSTICE CHATRA RAM JAT 2 Mr. Rajendra Mehta ) Mr. Dinesh Mehta ) for the petitioner. Mr. V.K. Mathur ) Mr. B.M. Bohra ) for the respondents. Mr. I.S. Pareekh ) Mr. L.R. Choudhary) ________ BY THE COURT:- (PER HON'BLE RAJESH BALIA, J.) In these petitions, the parties have joined the issue about the ambit and scope of Rule 57CC of the Central Excise Rules, 1944 about the availing of Modvat Credit on duties paid on inputs used at smelter by the petitioner-company vis-a-vis the part of sulphric acid produced by it in its sulphuric acid plant and sold to IFCO, a manufacturer of furtilizer, 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 exemptions notifications issued from time to time. For the present purposes, we may notice relevant provisions of statute, rules and notification relevant for our purposes. 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 velorum. 3 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, 1944, by the Central Government the relevant provision reads as under:- “Exemption and effective rates of basic excise duty for specified goods of Chapters 9 to 96.-- In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 944 (1 of 1944), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts excisable goods of the description specified in column (3) of the Table below or specified in column (3) of the said Table read with the concerned List appended hereto, as the case may be, and falling within the Chapter, heading No. Or sub-heading No. Of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) (hereinafter referred to as the Central Excise Tariff Act), specified in the corresponding entry in column (2) of the said Table,- 4 (a) from so much of the duty of excise specified thereon under the First Schedule (hereinafter referred to as the First Schedule) to the Central Excise Tariff Act, as is in excess of the amount calculated at the rate specified in the corresponding entry in column (4) of the said Table; and (b) from so much of the Special duty of excise leviable thereon under the Second Schedule (hereinafter referred to as the Second Schedule) to the Central Excise Tariff Act, as is in excess of the amount calculated at the rate specified in the corresponding entry in column (5) of the said Table, subject to the relevant conditions specified in the annexure to this notification, and referred to in the corresponding entry in column (6) of the said Table: Explanation.- For the purpose of this notification, the rates specified in columns (4) and (5) of the said Table are ad valorem rates, unless otherwise specified :- Table ------------------------------------------------------------ ------ 5 S. Chapter Description of goods Rate under Rate Condi- No. or heading the first under tion No. No. Or sub- Schedule Second heading no. Schedule ------------------------------------------------------------ ------ (1) (2) (3) (4) (5) (6) ------------------------------------------------------------ ------ 1 ... ....... .... .... .... 2 to 35 ... ....... .... .... .... 36 28 Sulphuric acid, oleum, Nil - 5 oxygen and ammonia used in the manufacture of fertilizers 37 to 272 ... ....... .... .... .... ------------------------------------------------------------ ------ The nil rate is applicable subject to condition No.5 mentioned in the annexure appended to the General Exemption No.66, which inter alia reads as under:- “5. Where such use is elsewhere than in the factory of production the exemption shall be allowed if the 6 procedure laid down in the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001, is allowed.” The Rule 57 CC reads as under:- Rule 57 CC. 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 manufacturer 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 or 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 manufacturer shall, unless the provisions of sub-rule (9) are complied with, pay an amount equal to eight per cent of the price (excluding sales tax and other taxes, if any, payable on such goods) of 7 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. (2) The amount mentioned in sub-rule (1) shall be paid by the manufacturer 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. (3) 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 8 within Chapter 85; and (d) Newsprint, in rolls 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. (6) 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. (7) 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. (8) 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 9 other taxes, if any, payable) at which such goods are ordinarily sold by the manufacturer 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). (9) In respect of inputs (other than inputs used as fuel) which are used in or in relation to the manufacture 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.” The factual matrix which is in short and about which there is no dispute is that the petitioner company as an smelter wherein non ferrous metal like refined zinc and lead are being manufactured and in the said process sulphuric di oxide gas is produced which is a bye product. Due to environment laws, the petitioner was prohibited from releasing the said gas. It has, therefore, set up a sulphuric acid plant in the said smelter. In the said plant sulphuric di 10 oxide is used for the product of sulphuric acid as an input. The sulphuric acid is manufactured in separate. From the smelter where the sulphuric di oxide is produced as a bye product of the activity of the smelter plant is passed on to sulphuric acid plant and thereafter the sulphuric acid is produced by the chemical process in the acid plant. In other words, the sulphuric acid is not product of the same plant where the zinc and lead are being manufactured. The question relates to availing of modvat credit in respect of Duties paid on the inputs used in smelter. So far as the product of smelter is concerned, there is no dispute that the same are chargeable to duty and inputs used therein are eligible for availing modvat credit. With reference to condition No.5 subject to which the sulphuric acid has been subjected to nil date of duty refers to Central Excise Removal of Goods at Concessional Rate of Duty for Manufacture of Excess Goods Rules, 2001. A perusal of the Rules of 2001 clearly indicates that these exemptions 11 are available to a manufacturer, who intends to receive the special goods of the notification at a concessional rate of duty for use in his manufacturing activity, he can acquire such product on payment of concessional rate of duty for his own purposes. In other words, the Rules of 2001 extends the benefit of exemption from the duty on goods when received in his factory which is otherwise subject to duty and not to the manufacturer of the product itself on removal. Rule 3 of the Rules of 2001 inter alia provides that a manufacturer, who intends to receive subject goods for specified use at concessional rate of duty, shall make an application in quadruplicate in the prescribed Form to the jurisdictional Assistant Commissioner of Central Excise or the Dy. Commissioner of Central Excise, as the case may be. The applicant shall execute a general bond for surety or security. The bond shall be for such amount as considered appropriate by the said Assistant Commissioner or Dy. Commissioner, to cover the recovery of duty liability estimated to be involved at any given point of time and the application of the manufacturer intending to receive goods on concessional rate of duty shall be counter signed by such authority certifying that the said manufacturer has executed a bond to his satisfaction in respect of the end use of the goods and 12 indicate the particulars of such bond. Sub Rule (7) of the Rule 3 makes the things clear that a copy of the application referred to in sub-rule (6) received by the manufacturer, shall be forwarded by the said manufacturer of fertilizer to the manufacturer of subject goods (to be used as inputs). It also envisages under Rule 6 that where the subject goods are not used by the manufacturer for intended purpose, the manufacturer shall be liable to pay the amount equal to the difference between the duty leviable on such goods but for exemption and that already paid if any at the time of removal from the factory of the manufacturer of the subject goods along with the interest and the provisions of the Section 11A/11B the Central Excise Act, 1944 was applied for effecting such recoveries. In other words, the Rules of 2001 make it clear that exemption or concession is applicable to the recipient of the subject goods and not to the manufacturer of the subject goods. In other words when X is the manufacturer of subject goods and Y is utilising the goods manufactured by X then Y is entitled to receive goods from X on payment of duty at concessional rate with a liability to make good the 13 concession availed by him in case he does not utilise the subject goods for the purpose of which concession is availed by him. There is no concession in envisaged for manufacturer X in respect of such goods manufactured by him. In the backdrop of aforesaid provisions the Revenue contends that to the extent sulphuric acid is ultimately cleared by the petitioner to the manufacturer of fertilizers on payment of nil duty in terms of Exemption No.66, on receipt of application counter signed by the competent authority in terms of Rule 2001, the petitioner is engaged in manufacture of goods which are partly liable to excise duty and partly liable to nil rate of duty on removal from factory of the petitioner to the factory of fertilizers producer. Therefore, in terms of Rule 57 CC Sub-Rule (9) he is required to maintain a separate account of using of inputs used in relation to manufacture of sulphuric acid cleared to fertilizers manufacturers and inputs used in other products which are chargeable to duty and in case the petitioner has not maintained the registers in terms of sub-rule (9) of Rule 57CC, he is liable to pay 8% of duty on the removals of sulphuric acid in terms of Rule 57CC. 14 On the other hand, it is contended by the learned counsel for the petitioner that at the very outset the inputs were received and used in the smelter plant, where end product is non-ferrous metals viz. Zinc and lead and both are subject to payment of Duty. Use of such inputs is complete in smelter plant. The same cannot be considered to be inputs referable to the plant where sulphuric acid is being produced inasmuch as once the production at the smelter plant is complete and the bye product of it namely sulpher di oxide gas is transmitted to another plant consumption of inputs at the smelter plant, which is engaged in manufacture of production of goods is complete. The inputs used in smelter are not and cannot be divided between their user in the smelter plant the sulphuric acid plant separately or proportionately. Therefore, Rule 57 CC in its very scheme, is not applicable to the petitioner as manufacture of zinc and lead at its smelter plant in respect of inputs used and consumed in smelter plant itself. It has further been contended, assuming it that the petitioner is engaged in manufacture of zinc on the one hand 15 and also sulphuric acid on the other hand. Both the products are excisable and are not exempted wholly from the payment of excise duty nor chargeable to nil rate of duty, when manufactured. The General Exemption No.66 about sulphuric acid is not referable to the petitioner- manufacturer, who is manufacturer of the subject goods but is applicable to the recipient of the subject goods on fulfillment of certain conditions, if he wants to utilise the same in manufacture of fertilizer. Therefore, exemption or concession under Exemption No.66 is not available to the petitioner as a manufacturer of the sulphuric acid but is available to the buyer of the sulphuric acid, who is engaged in manufacturing the fertilizers. The petitioner as a manufacturer of sulphuric acid is not engaged in production of goods which are exempt from payment of duty wholly or is liable to duty at nil rate. In this connection, the learned counsel has buttressed his arguments on principle that the modvat credit is availed by the petitioner manufacturer at the time when he receives the inputs in his factory. The condition to be fulfilled for availing the modvat credit, which governs his case, is to be on the date on which the inputs are received by the manufacturer and not at the time when the goods leaves the factory. Once on the 16 date of receipt, if on existing material, the manufacturer is entitled to avail the same on the very same day, his right to avail modvat credit on such date is not effected by happening of contingency in future, on which results in applicability of nil rate of Duty. Therefore, he contends that as on the date the petitioner had received inputs, he was engaged in the manufacture of zinc lead and sulphuric acid. This is without prejudice to first contention. As on the date when all the three types the goods were chargeable to duty and no exemption was available to the manufacturer as such on the commodity manufactured by him nor the duty was chargeable at that time at the nil rate. The chargeability to Duty also remain unaffected when goods are manufactured and sold or removed from factory in ordinary course. It is only in case sulphuric acid is sold to a manufacturer of fertilizer and the goods are received by such manufacturer on submission of his application counter signed by authorized officer in terms of Rules of 2001. In short become entitled to avail modvat credit, at given point of time attached with no illegality and invalidity, at the relevant time, no exemption as envisaged was attached to availability of modvat credit when inputs were received by the petitioner manufacturer in its smelter plant, it 17 became absolute entitlement, which could not be defeated on same concession made available to particular receipts of such end product, under certain conditions. The concern itself being conditional and defeasible, it could not defeat the indefeasible right to avail modvat credit in the first instance. Being a contingent concerned available to acquirer of such product could not affect right of petitioner manufacturer to avail modvat credit when the inputs were received by it at its factory, it cannot be recalled on subsequent turn of events. He further adds that even if subsequent to the date of receipt of inputs in his factory on which the manufacturer using inputs becomes entitled to avail modvat credit, the product made by him is exempted from payment of duty, it cannot effect the modvat credit availed by him prior to such exemption is notified. These are the basic contentions that are raised before us. Credit of duty paid on excisable goods when used as inputs in production of some other goods, known as modvat credit was first introduced in 1992. Rule 57A has 18 undergone amendments from time to time and the modvat scheme has been later on substituted by the Cenvet scheme. But the basic principle remains that the Central Government may by notification in the official gazette specify final products (finished excisable goods) for the purpose of allowing credit of any duty of excise or additional duty under Section 3 of the Customs Tariff Act 1975 paid on the goods used in or in relation to the manufacturer of the said final product, referred to as the inputs and the manufacturer availing such credit is permitted to utilise such credits towards the payment of duty of excise leviable on the final product, whether under the Central Excise Act or under any other Act as may be specified in said notification. In other words, in respect of the inputs used in the production of the final products by a manufacturer which has been specified in notification issued under Rule 57A, the manufacturer is entitled to avail credit of duties paid on inputs in terms of the scheme laid down in Rules that followed the Rule 57A. Rule 57B is not relevant for the present purpose. Rule 57 C prohibited the availing of credit of specified duty, on such quantity of inputs which are used in 19 the manufacture of final products which are exempted from the whole of the duty of excisable or chargeable on Nil rate of duty. Sub-Rule (2) of Rule 57 C inter alia provided that where a manufacturer avails the credit of specified duty on any inputs and he is engaged in manufacture of any final product which is chargeable to duty as well as in the manufacture of any other final product which is exempt from the whole of duty of the excise levied thereon or is chargeable to the nil rate of duty, in the same factory, the provisions of sub-rule (1) shall be deemed to be satisfied only when the provisions of sub-rule (1) or sub-rule (5) or sub-rule (9) of Rule 57 CC are complied with, or where goods are exported under bond in terms of the provisions of Rule 13. Rule 57 C does not apply to the inputs used as fuel. It may be noticed that Rule 57 C was applicable to end product exempted from the payment of duty or chargeable to Nil rate of duty only in case where such product is manufactured in the same factory. Rule 57 CC was introduced in 1996 vide notification dated 23rd July, 1996 for the first time. The Rule 20 57 CC was not inhibited by the condition of final product chargeable to the duty as well as not chargeable to the duty to be manufacture in the same factory, but was made applicable to all cases where the manufacturer has taken credit of the specified duty on any inputs other than the inputs used as fuel which is ordinarily used in relation to manufacture of final product, whether directly or indirectly and whether contained in the said final product or not. As is evident from the provisions noticed above that in respect of a manufacturer, who is engaged in the manufacturing of final product which is chargeable to duty as well as in other final product which is exempted from the whole of the duty of excise leviable thereon or is chargeable to the Nil rate, is under an obligation in terms of Rule 9 to maintain a separate inventory and accounts of the receipt and use of inputs for the purpose in relation to the manufacture of any goods which are exempted from the whole of the duty of excise leviable thereon or chargeable at nil rate of duty. Significantly this provision postulates making of separate inventory and maintaining separate accounts at the 21 time of receipts of inputs in the factory. Its significance lies in revealing that to attract above obligation, the chargeability of any end product manufactured by the manufacturer to the duty or its exemption from the whole of Duty or chargeability to Nil rate must be discernible at the time of receipt of inputs in the factory. When the entitlement to availing modvat or cenvat credit is to be determined, the period of such determination is not referable to a future date, when the end product leaves the factory. If at the time of receipt of the inputs in the factory, the goods manufactured by the manufacturer in question predictably cannot be said to be chargeable to the duty or exempted from duty or liable to charge at nil rate, the very maintenance of separate