Case: Union Of India  Vs. M/S Hindustan Zinc Ltd

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.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-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 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 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 thisCopper (C.A. NO.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 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 courts 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. Departments appeal is against this order of 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 wasIndia Ltd. (C.A. No.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 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 Highaforesaid 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 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 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 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 Rulesexempted goods and not exempted finalBy 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 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,

Court's reasoning:
That is the reason why the department accepted the position before the Tribunal that sulphuric acid is a by-product.In these circumstances the position taken now by the appellant that sulphuric acid cannot be treated as a by-product cannot be countenanced.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 sulphurictherefore, 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.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. 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 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 GAILs 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 respondents case is squarely covered by the judgment in GAILs case.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