2010 (9) TMI 857 - HC - Central Excise

Non maintenance of separate accounts for the inputs used in dutiable goods and exempted goods - Whether assessee was required to pay an amount equal to 8% or 10% of the value of the exempted goods as the common input (Hydrochloric Acid) used for the manufacture of both dutiable goods (Gelatin) and exempted goods (Di-Calcium Phosphate) - Held that - Examining the applicability of the sub-rule (1) & (2) of Rule 6, to the facts of the present case it is not as if more quantity of Hydrochloric Acid is used than that required for manufacturing Gelatin or that by using a smaller amount of Hydrochloric Acid, the production of Mother Liquor could be averted. In the manufacturing process adopted by the assessee, it is not possible to manufacture Gelatin without Mother Liquor coming into existence. Thus, when the entire quantity of input viz. Hydrochloric Acid is used in the manufacture of the final product being Gelatin which is a dutiable product, the mere fact that a by-product emerges during the process would not bring the by-product within the ambit of Rule 6 of the Rules so as to call for maintaining separate accounts in respect of the same. When the entire quantity of input is used in the manufacture of Gelatin, the question of maintaining separate accounts or of paying a percentage of the total price of the exempted goods would not arise. In the peculiar facts of the present case, sub-rule (1) of Rule 6, itself would not come into play inasmuch the manufacturer does not deliberately use any quantity of the inputs, viz. Hydrochloric Acid for manufacturing Mother Liquor, the entire Hydrochloric Acid is used in the manufacture of Gelatin. Thus, when no input is specifically used for the purpose of manufacturing Di-Calcium Phosphate, there would be no question of maintaining separate accounts for receipt, consumption and inventory of input.

Summary

Issues Involved:
1. Requirement to pay an amount equal to 8% or 10% of the value of exempted goods under Rule 6(3)(b) of Cenvat Credit Rules, 2002/2004.
2. Error in law by CESTAT in applying Rules 57CC and 57D of erstwhile Central Excise Rules, 1944.

Issue 1: Requirement to Pay Amount Under Rule 6(3)(b) of Cenvat Credit Rules, 2002/2004

The appellant-revenue challenged the Tribunal's order, arguing that the assessee used Hydrochloric Acid, a common input, in the manufacture of both dutiable goods (Gelatin) and exempted goods (Di-Calcium Phosphate). The assessee did not maintain separate accounts for the inputs as required under Rule 6(2) of the Cenvat Credit Rules, 2002. Consequently, the revenue contended that the assessee was liable to pay an amount as prescribed under Rule 6(3). The Tribunal, however, set aside the order of the Commissioner, leading to the current appeal.

The court noted that the manufacturing process of Gelatin inevitably produces a by-product, Mother Liquor, which is then used to manufacture Di-Calcium Phosphate. The entire quantity of Hydrochloric Acid is used in the manufacture of Gelatin, and the emergence of Mother Liquor is an inevitable by-product. Therefore, the court held that the entire quantity of input is used for the dutiable product (Gelatin), and the by-product (Mother Liquor) does not necessitate maintaining separate accounts or paying the amount under Rule 6(3).

Issue 2: Error in Law by CESTAT in Applying Rules 57CC and 57D of Erstwhile Central Excise Rules, 1944

The revenue argued that the Tribunal erred in applying Rules 57CC and 57D of the erstwhile Central Excise Rules, 1944, which were not applicable under the new Cenvat Credit Rules, 2002/2004. The court, however, found that the facts of the case did not require the application of Rule 6(2) or Rule 6(3) of the Cenvat Credit Rules, 2002, since the entire input (Hydrochloric Acid) was used in the manufacture of Gelatin. The court referenced the Supreme Court decision in Commissioner of Central Excise, Mumbai v. National Organic Chemical Industries Limited, which held that the emergence of by-products during the manufacturing process does not necessitate denial of benefits or additional obligations under the rules.

The court concluded that the Tribunal's reliance on the Bombay High Court decision in Rallis India Limited v. Union of India was appropriate. The decision held that by-products arising during the manufacturing process of dutiable goods do not require the manufacturer to reverse credit or pay a presumptive amount under the rules.

Conclusion

The court found no legal infirmity in the Tribunal's order and dismissed the appeal, stating that no substantial question of law arose from the Tribunal's decision. The court emphasized that the entire input was used for the dutiable product, and the by-product's emergence did not trigger the requirements of Rule 6(2) or Rule 6(3) of the Cenvat Credit Rules, 2002/2004.