1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION WRIT PETITION NO.8435 OF 2006 Rallis India Limited, a company incorporated within the meaning of Companies Act, 1956 and having its registered Office at Apeejay House, 7th Floor, 3 Dinshaw Vachha Road, Churchgate, Mumbai - 400 020 ..Petitioner V/s. 1. The Union of India, through the Secretary, Ministry of Finance, Department of Revenue, North Block, New Delhi - 1. 2. The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) through its Registrar, at Jai Centre, 3rd floor, 34, P. D’Mello Road, Poona St., Mumbai - 400 001. 3. The Commissioner of Central Excise, Salem Commissionerate, Salem having his office at No.1 Foulks Road, Foulks Compound, Annai Road, Salem - 636 001 ..Respondents Mr.Sridharan with Mr.Prakash Shah i/by M/s.PDS Legal for the petitioner. Mr.P.S. Jetly with Mr.R.C. Master for the respondent. CORAM : D.K. DESHMUKH & J.P. DEVADHAR, JJ. DATED : 16TH DECEMBER, 2008. ORAL JUDGMENT : (Per J.P. Devadhar, J.) ORAL JUDGMENT : (Per J.P. Devadhar, J.) ORAL JUDGMENT : (Per J.P. Devadhar, J.) 1. This writ petition is filed to challenge the Larger Bench decision of the CESTAT dated 13-12-2006. 2 The Larger Bench was constituted because of the conflicting decisions rendered by the Tribunal in the case of Rama Industries Ltd. V/s. C.C.E. Rama Industries Ltd. V/s. C.C.E. Rama Industries Ltd. V/s. C.C.E. reported in 2004 (178) E.L.T.720 (T) 2004 (178) E.L.T.720 (T) 2004 (178) E.L.T.720 (T) and in the case of Binani Binani Binani Zinc Ltd. V/s. CCE Zinc Ltd. V/s. CCE Zinc Ltd. V/s. CCE reported in 2005 (187) ELT 390 2005 (187) ELT 390 2005 (187) ELT 390 (T) (T) (T). 2. The question referred to the Larger Bench was:- " Whether 8% of the amount as per erstwhile Rule 57CC of Central Excise Rules, 1944 (now Rule 6 of Cenvat Credit Rules, 2002) is required to be discharged, before removal of by products / subsidiary products when such products are exempted from whole of duty therein in light of the conflicting view in the above decisions. " The Larger Bench of the Tribunal concurred with the views expressed by the Tribunal in the case of Binani Zinc Ltd. (supra) and by the impugned decision held that the petitioner who manufactured both dutiable and exempted final products by utilizing duty paid common inputs (Modvat credit of which was taken) was liable to pay an amount equal to 8% of the value of the exempted final product under Rule 57CC of Central Excise Rules, 1944 / Rule 6 of Cenvat Credit Rules, 2002. The larger Bench has also recorded a finding to the effect that HCL was not a necessary input required in the manufacture of gelatin. 3 3. Facts relevant to the present case are that since 1971 the petitioner is engaged in the manufacture of gelatin in its factory at Ootacamund, Tamil Nadu. Gelatin is an excisable product and falls under Chapter heading 35.03 of the Central Excise Tariff Act, 1985. 4. According to the petitioner, animal bone is the basic raw material required for the manufacture of gelatin. Animal bones contain both organic material known as protein as well as inorganic material known as phosphorus. According to the petitioner, when the animal bones are treated with HCL, organic and inorganic substances in the animal bones get separated. Organic substances are insoluble in water and are known as ‘Ossein’. Inorganic substances are water soluble and are known as ‘mother liquor’ / ‘spent liquor’ / ‘phosphoryl liquor’. 5. The insoluble organic substances known as ‘Ossein’ was further processed to manufacture gelatin which was cleared on payment of excise duty and the inorganic substances known as mother liquor being as waste liquid, was thrown away. 6. ‘Mother liquor’ being hazardous in nature, 4 the Pollution Control Board recommended to the petitioner to process the mother liquor instead of throwing it away. Accordingly, in the year 1981 the petitioner set up a plant for processing the mother liquor into phosphoryl A and Phosphoryl B which are excisable under heading 23.02 of the Central Excise Tariff but are wholly exempt from payment of excise duty. 7. Thus, the manufacture of Gelatin involved the process of treating the animal bones with HCL, when ossein and mother liquor were obtained. Ossein was further processed to obtain Gelatin which was cleared on payment of duty. Mother liquor was further processed to manufacture phosphoryl A & B, which being exempt, was cleared without payment of duty. 8. With the introduction of the Modvat Scheme in the year 1986, the petitioner became entitled to take credit of duty paid on inputs used in the manufacture of final products and utilize the same to pay the excise duty payable on the final products. The object of the Modvat Scheme was to avoid the cascading effect of taxation on inputs used in or in relation to the final products. Under Rule 57C of the Modvat Scheme, credit of duty paid on inputs was not allowable if the final products manufactured from duty paid inputs were exempt. Rule 57D further 5 provided that the credit of duty paid on the inputs used in the dutiable final product would not be denied or varied, if part of the inputs were contained in any waste, refuse or by product arising in the manufacture of the dutiable final product and it was immaterial as to whether excise duty was payable or not on such waste, refuse or by-product. In other words, as per Rule 57D, even if the waste refuse or by-product arising in the manufacture of dutiable final product are exempted from payment of excise duty, the credit of duty paid on the inputs used in the manufacture of dutiable final products cannot be denied or varied. 9. In the present case, since 1986 the petitioner availed the credit of duty paid on HCL used as input in the manufacture of gelatin and the waste mother liquor arising in the manufacture of gelatin was used in the manufacture of phosphoryl ‘A’ and ‘B’ and was cleared without payment of duty in view of the exemption. 10. Rule 57CC was introduced into the Modvat Scheme with effect from 1/9/1996 under which a manufacturer who manufactures by using common inputs, a final product which is chargeable to duty as well as a final product which is wholly exempt or chargeable to nil rate of duty was required to 6 maintain separate accounts regarding the inputs received and used in the manufacture of exempted goods, failing which the manufacturer was liable to pay 8% of the price payable on the exempted final products at the time of its clearance from the factory. 11. At this stage, it would be appropriate to quote Rule 57C, 57CC and 57D (to the extent relevant) as they stood during the period 1998-99 :- "Rule 57C. Credit of duty not to be allowed if final "Rule 57C. Credit of duty not to be allowed if final "Rule 57C. Credit of duty not to be allowed if final products are exempt products are exempt products are exempt.- (1) No credit of the specified duty shall be allowed on such quantity of inputs which is used in the manufacture of final products [which are exempt from the whole of the duty of excise leviable thereon or are chargeable to nil rate of duty] except when the final products are either, - (i) ...... (ii) ...... (iii) ...... (iv) ...... (2) Where a manufacturer avails of the credit of specified duty on any inputs and he is engaged in the 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 the duty of excise leviable thereon or is 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 provisions of sub-rule (1) or sub-rule (5) or sub-rule (9) of rule 57CC are complied with, or where goods are exported under bond in terms of the provisions of rule 13.] (3) ...... (4) ...... RULE 57CC. Adjustment of credit on inputs used in RULE 57CC. Adjustment of credit on inputs used in RULE 57CC. Adjustment of credit on inputs used in exempted final products or maintenance of separate exempted final products or maintenance of separate exempted final products or maintenance of separate inventory and accounts of inputs by the inventory and accounts of inputs by the inventory and accounts of inputs by the manufacturer.- manufacturer.- manufacturer.- (1) Where a manufacturer is engaged 7 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 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 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 (1) of 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) ....... (4) ....... (5) ....... (6) ....... (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 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 8 purpose and shall not take credit of the specified duty paid on such inputs. " RULE 57D. Credit of duty not to be denied or RULE 57D. Credit of duty not to be denied or RULE 57D. Credit of duty not to be denied or varied in certain circumstances- varied in certain circumstances- varied in certain circumstances- (1) Credit of specified duty shall not be denied or varied on the ground that the 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 shall also not be denied or varied in case any intermediate products have come into existence during the course of manufacture of final products or the inputs are used in the manufacture of capital goods as defined in rule 57Q and such intermediate products or capital goods are not chargeable to duty of excise. Rule 6 of CENVAT credit Rules, 2002 is similar to Rule 57CC of 1944 Rules. 12. It is not in dispute that during the period from 1971 to 1981 the petitioner had cleared gelatin on payment of excise duty and threw away the mother liquor arising in the above process as waste. During the period from 1981 to 1986, the petitioner manufactured & cleared two final products, namely, gelatin on payment of excise duty and ‘phosphoryl ‘A’ & ‘B’ without payment of duty as it was exempted. During the period from 1986 to 1996, the petitioner cleared gelatin on payment of duty after utilizing the credit of duty paid on HCL and continued to clear Phosphoryl ‘A’ & ‘ B’ without payment of excise duty 9 as it was exempted. Even after the insertion of Rule 57CC in the year 1996, the petitioner continued to clear gelatin on payment of excise duty by utilising the credit of duty paid on HCL and clear exempted phosphoryl ‘A’ & ‘ B’ without payment of duty. 13. However, during the period from 4-4-1997 to 29-4-2004, the Excise authorities issued various show-cause notices under section 11A of the Central Excise Act, 1944 (‘Excise Act’ for short) calling upon the petitioner to show cause as to why an amount equal to 8% of the price of the exempted final products, namely Phosphoryl ‘A’ and ‘B’ cleared during the period from September, 1996 to December, 2003 should not be recovered in view of the failure on part of the petitioner to maintain separate accounts as contemplated under Rule 57CC of the Central Excise Rules / Rule 6 of the CENVAT Credit Rules, 2002. By the said show cause notices, the petitioner was further called upon to show cause as to why interest should not be demanded and penalty should not be imposed under the provisions of the Excise Act and the Rules made thereunder. 14. The petitioner in its reply contended that the duty paid HCL was an input used in the manufacture of gelatin. It was contended that the mother liquor arising in the manufacture of gelatin 10 was a waste and, therefore, in terms of Rule 57D, the petitioner was entitled to full credit of duty paid on HCL used in the manufacture of dutiable gelatin. In such a case, it was contended that Rule 57CC was not applicable. 15. By an order in original dated 23-12-2004, the adjudicating authority rejected the contention of the petitioner and held that Rule 57CC was applicable to the present case and accordingly, confirmed the demand with interest and also imposed penalty upon the petitioner. 16. The petitioner filed an appeal against the aforesaid adjudication order and the Tribunal in view of the conflicting decisions, referred the matter to a larger Bench of CESTAT. The larger Bench after hearing the parties, by its decision which is impugned in the present petition, held that :- (a) HCL is not a necessary input required in the manufacture of gelatin and the same can be obtained without the use of HCL. HCL is used for extracting the inorganic part of the bones, which are further processed to manufacture phosphoryl A & B. Thus, HCL is used in the manufacture of phosphoryl A & B irrespective of emergence of mother liquor in between. In this 11 connection, the Larger Bench relied upon the decision of the Apex Court in the petitioner’s own case reported in 1999(114) E.L.T. 5 (S.C.) 1999(114) E.L.T. 5 (S.C.) 1999(114) E.L.T. 5 (S.C.) [Rallies India Ltd. V/s. State of Tamil Nadu]. (b) Relying upon a decision of the Apex Court in the case of Commissioner of Sales Tax V/s. Commissioner of Sales Tax V/s. Commissioner of Sales Tax V/s. Bharat Petroleum Corporation Ltd. Bharat Petroleum Corporation Ltd. Bharat Petroleum Corporation Ltd. reported in 1995 (77) E.L.T. 790 (S.C.) 1995 (77) E.L.T. 790 (S.C.) 1995 (77) E.L.T. 790 (S.C.), it was held that phosphoryl A & B was consciously manufactured by the petitioner by using duty paid HCL as inputs and since phosphoryl ‘A’ & ‘B’ are exempt from payment of excise duty, Rule 57CC was squarely applicable. (c) Rule 57CC applies where dutiable final product as well as exempted final product are manufactured from a common input and the rule does not make any distinction between an intended final product or unintended emergence of by-product. Therefore, even if mother liquor arises as an unintended by-product, the same is further used in the manufacture of phosphoryl A & B which attracts nil rate of duty and, therefore, the provisions of Rule 57CC would be applicable. 12 (d) the expression ‘by product’ in Rule 57D has to be interpreted in the context of the words ‘waste’ or ‘refuse’ used in Rule 57D. For example floor sweepings arise in the manufacture of biscuits. Such floor sweepings which arise in the manufacture of biscuits being waste, no excise duty is payable on floor sweepings and excise duty is payable only on biscuits. In such a case, as per Rule 57D, the entire credit of duty paid on inputs can be used in discharging the duty payable on biscuits. Similarly, iron & steel scrap arises as a waste during the manufacture of iron products. If iron & steel scrap are excisable, then duty has to be paid while clearing the iron & steel scrap and if exempted, Rule 57CC would apply. Therefore, Rule 57D refers to waste, scrap and by product which are not excisable at all. In the present case since two final products emerge out of a common input and duty is payable on one final product and the other final product is exempt, Rule 57CC is applicable to the facts of the present case. The question referred to the larger Bench was answered accordingly. 17. We have heard Mr.Sridharan, learned Advocate 13 for the petitioner and Mr.Jetly, learned Advocate for the respondents. On careful consideration of the rival submissions, we find it difficult to sustain the decision of the larger Bench for the reasons enumerated hereinafter. 18. At the outset it must be held that the Larger Bench committed a fundamental error in holding that HCL was not an input required in the manufacture of gelatin, because, firstly that was not the question referred to it for its decision. Secondly, the specific case of the revenue set out in the show-cause notice was that HCL was the common input used in the manufacture of two final products namely, gelatin & phosphoryl ‘A’ and ‘B’ and since duty on phosphoryl ‘A’ and ‘B’ is exempted, Rule 57CC is applicable. Therefore, the finding given by the larger Bench that HCL was not an input required in the manufacture of Gelatin is beyond the scope of reference and contrary to the facts of the case on record. 19. It is evident that the Larger Bench arrived at the aforesaid conclusion by erroneously following the decision of the Apex Court in the assessee’s own case reported in 114 ELT 5 (S.C.). That decision is distinguishable on facts. The question before the Apex Court in that case, related to the 14 classification of gelatin manufactured by the petitioner under the provisions of Tamil Nadu General Sales Tax Act, 1959 and not relating to the duty liability under the provisions of the Central Excise Act and the Rules made thereunder. Moreover, whether HCL was an input required in the manufacture of gelatin or not was not an issue directly or indirectly considered by the Apex Court in the aforesaid case. Therefore, when there was no dispute regarding user of HCL as an input in the manufacture of gelatin and even the case of the revenue was that HCL was an input required in the manufacture of gelatin, the Larger Bench was not justified in relying upon a decision of the Apex Court rendered in the context of the Sale tax law and holding that HCL was not an input required in the manufacture of gelatin for the purposes of duty liability under the Excise law. 20. If the findings of the Larger Bench that HCL is not an input required in the manufacture of gelatin is accepted, then it would mean that in the present case, HCL is exclusively used in the manufacture of Phosphoryl ‘A’ and ‘B’ which is exempted from payment of excise duty. If the final product is exempted from payment of duty then the credit of duty paid on the inputs used in the manufacture of exempted final products is not 15 available. In such a case, whatever input credit taken has to be reversed and there would be no question of demanding the presumptive amount under Rule 57CC. Rule 57CC would apply only in cases where the manufacturer is unable to reverse exact amount of credit availed on inputs used in the manufacture of exempted final product on account of not maintaining separate account. If the finding of the larger Bench that HCL is exclusively used in the manufacture of phosphoryl ‘A’ and ‘B’ is accepted, then it would be simply a case of reversing the entire credit and not a case of demanding presumptive amount under Rule 57CC. 21. Thus, in the facts of the present case, the specific case of the revenue is that HCL is a common input used in the manufacture of excisable gelatin and exempted phosphoryl ‘A’ & ‘B’. The question, therefore, to be considered in the present case is, whether the petitioner is liable to reverse the credit to the extent the input is used in the manufacture of exempted phosphoryl ‘A’ and ‘B’ by maintaining separate account or alternatively pay the presumptive amount under Rule 57CC ? 22. Animal bones are the basic raw material required to manufacture gelatin. When animal bones are treated with HCL, organic and inorganic 16 substances in the animal bones get separated. Organic substances (‘ossein’) which are in the insoluble form are separated from the soluble inorganic substances known as ‘mother liquor’. Ossein is further processed to manufacture gelatin. It is not in dispute that the mother liquor is a waste arising in the manufacture of gelatin. 23. Under Rule 57C and 57D of the Central Excise Rules, 1944, credit of duty paid on HCL which is used as an input in the manufacture of gelatin cannot be denied or varied merely because HCL is contained in the waste mother liquor arising in the manufacture of gelatin and that no excise duty is payable on the mother liquor. Rule 57D specifically provides that even if no excise duty is payable on the waste arising in the manufacture of dutiable final product, the credit of duty paid on the input used in the manufacture of dutiable final product cannot be denied or varied. In the present case, excise duty is payable on the final product namely gelatin and as per Rule 57D, even though no excise duty is payable on the waste mother liquor arising in the manufacture of gelatin, the petitioner is entitled to avail the entire credit of duty paid on HCL which is used as input. 24. It is, however, contended by the revenue that 17 on the introduction of Rule 57CC, the petitioner was liable to maintain separate account so as to ascertain the quantity of HCL used in the manufacture of exempted phosphoryl ‘A’ and ‘B’, and since no such account was maintained the petitioner was liable to pay amount at 8% of the value of the phosphoryl ‘A’ and ’B’ under Rule 57CC. 25. There is no merit in the above contention of the revenue. Under the Modvat Scheme, credit of duty paid on inputs can be availed only if such inputs are