2008 (11) TMI 75 - AT - Central Excise

Common input (HCL) used in the manufacture of the dutiable (gelatine) and the exempted goods (DCP/EDCP) - non-maintenance of separate accounts - SCN issued proposing recovery of 8% of sale price on exempted products DCP/EDCP arising from treatment of mother liquor are by products maintenance of separate account is impossible & inconceivable thus, a waste arising out of principal process of manufacture does not burden the Assessee with levy u/r 6(3)(b) of CCR assessee s appeal allowed

Issues Involved:
1. Use of hydrochloric acid as a common input in the manufacture of both dutiable and exempted products.
2. Requirement to maintain separate accounts for inputs used in the manufacture of dutiable and exempted products.
3. Applicability of Rule 57CC of the Central Excise Rules 1944 and Rule 6 of the Cenvat Credit Rules.
4. Classification of Di-Calcium Phosphate (DCP) and Enriched Di-Calcium Phosphate (EDCP) as by-products or final products.
5. Impact of previous judgments and Board instructions on the current case.

Detailed Analysis:

1. Use of Hydrochloric Acid as a Common Input:
The appellant uses hydrochloric acid in the initial stage of manufacturing gelatine, which results in two products: ossein and mother liquor. The mother liquor, treated further due to pollution control regulations, results in DCP and EDCP. The appellant argued that the entire hydrochloric acid is used in the manufacture of gelatine and not directly in the manufacture of DCP and EDCP. The Tribunal observed that hydrochloric acid is used in the initial demineralization process, leading to the emergence of both ossein and mother liquor. Thus, hydrochloric acid is indirectly related to the manufacture of exempted products.

2. Requirement to Maintain Separate Accounts:
The appellant did not maintain separate accounts for hydrochloric acid used for dutiable and exempted products. The Tribunal noted that it is impossible to segregate the quantity of hydrochloric acid used for dutiable and exempted products because the entire quantity is used at an initial common stage. Therefore, maintaining separate accounts is neither feasible nor warranted.

3. Applicability of Rule 57CC and Rule 6:
The Department argued that the appellant should pay 8% of the value of exempted products under Rule 57CC and Rule 6 due to the use of common inputs without maintaining separate accounts. The Tribunal referred to the decision in Swadeshi Polytex Ltd., which held that credit on inputs cannot be denied even if by-products emerge. The Tribunal concluded that the entire hydrochloric acid is used in the composite process at the initial stage, making it eligible for credit, and thus, Rule 57CC and Rule 6 are not applicable.

4. Classification of DCP and EDCP:
The appellant contended that DCP and EDCP are by-products, not final products. The Tribunal agreed, noting that these products emerge from the treatment of mother liquor as per pollution control regulations. The Tribunal emphasized that no hydrochloric acid is added during the processing of mother liquor, and these by-products do not contain hydrochloric acid as an input.

5. Impact of Previous Judgments and Board Instructions:
The Tribunal considered previous judgments where similar demands were dropped and the Department did not appeal. The Tribunal also referred to Board instructions clarifying that the emergence of by-products cannot be a ground for denying credit on inputs. The Tribunal concluded that the ratio of Swadeshi Polytex Ltd. is applicable, and the decision in Rallies India Ltd. does not consider this precedent.

Conclusion:
The Tribunal held that the entire hydrochloric acid is used in the manufacture of gelatine, and the emergence of DCP and EDCP as by-products does not warrant denial of credit or the requirement to maintain separate accounts. The appeal was allowed with consequential relief.

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