2007 (1) TMI 94 - HC - Central Excise

Scope of Rule 57CC - Prohibition against claiming credit on exempted goods applies in case where such exemption from payment of duty on end product is predictably known at the time the recipient of inputs is entitled to take credit of duty paid on input Rule 57CC is not applicable

Issues Involved:
1. Ambit and scope of Rule 57CC of the Central Excise Rules, 1944.
2. Availing of Modvat credit on duties paid on inputs used in smelter.
3. Applicability of General Exemption No. 66 under the Central Excise Act, 1944.
4. Requirement to maintain separate inventory and accounts under Rule 57CC(9).
5. Determination of entitlement to Modvat credit based on the date of receipt of inputs.

Issue-wise Detailed Analysis:

1. Ambit and Scope of Rule 57CC of the Central Excise Rules, 1944:
The judgment examines Rule 57CC, which mandates that if a manufacturer produces both dutiable and exempted final products, they must either pay an amount equal to 8% of the price of the exempted products or maintain separate accounts for inputs used in the production of exempted goods. The court highlights that Rule 57CC applies to manufacturers producing goods that are either fully exempt from duty or chargeable to a nil rate of duty. The rule's operation is determined at the time the manufacturer becomes entitled to avail Modvat credit, not at the time of clearance of the final product.

2. Availing of Modvat Credit on Duties Paid on Inputs Used in Smelter:
The petitioner-company manufactures zinc and lead, and during this process, sulphur dioxide gas is produced as a by-product, which is then used to manufacture sulphuric acid in a separate plant. The court notes that the inputs used in the smelter are eligible for Modvat credit as they are used in the production of dutiable final products (zinc and lead). The court emphasizes that the entitlement to Modvat credit is determined at the time the inputs are received in the factory.

3. Applicability of General Exemption No. 66 under the Central Excise Act, 1944:
General Exemption No. 66 allows sulphuric acid used in the manufacture of fertilizers to be cleared at a nil rate of duty, subject to certain conditions. The court clarifies that this exemption applies to the recipient of the sulphuric acid (the fertilizer manufacturer) and not to the manufacturer of the sulphuric acid. Therefore, the petitioner-company, as the manufacturer of sulphuric acid, is not producing goods that are exempt from duty or chargeable to a nil rate of duty.

4. Requirement to Maintain Separate Inventory and Accounts under Rule 57CC(9):
The court discusses the requirement under Rule 57CC(9) to maintain separate inventory and accounts for inputs used in the production of exempted goods. It concludes that this requirement is relevant only if, at the time of receipt of the inputs, the final products are known to be exempt from duty or chargeable to a nil rate of duty. Since the sulphuric acid produced by the petitioner was not exempt from duty at the time of receipt of inputs, the requirement to maintain separate accounts does not apply.

5. Determination of Entitlement to Modvat Credit Based on the Date of Receipt of Inputs:
The court emphasizes that the entitlement to Modvat credit is determined at the time the inputs are received in the factory. It is not affected by subsequent events, such as the final product being cleared at a nil rate of duty due to an exemption notification. The court cites the Supreme Court decision in Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd., which held that once a manufacturer becomes entitled to avail Modvat credit, it cannot be defeated unless otherwise provided by law.

Conclusion:
The court concludes that Rule 57CC does not apply to the petitioner-company as their product (sulphuric acid) was not exempted from duty or chargeable to a nil rate of duty at the time of receipt of inputs. The entitlement to Modvat credit is determined based on the state of affairs at the time of receipt of inputs, and subsequent events do not affect this entitlement. The petitions are allowed, and the impugned notices are quashed.

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