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2018 (2) TMI 819 - HC - Central ExciseModvat Credit - Manufacture of Steam - Whether STEAM should not be treated as final product when it is not only manufactured through a conscious activity undertaken by the respondents but also requires several well defined steps to manufacture it? - Held that - there is no dispute as to the process adopted by the assessee to manufacture Carbon Black from CBFS or even as to the generation of steam - admittedly only lean gases or off gases were released in the manufacture of Carbon Black from CBFS by way of technological necessity. These gases contained Carbon Monoxide. Upon burning Carbon Monoxide content in off gases / lean gases to render that waste or refuse or by-product fit for release in the atmosphere, heat was obtained. Further, it was heat and not off gases or lean gases thus produced that was used to produce steam - steam is a final product. Whether the benefit of Rule 57-D (1) of the erstwhile Central Excise Rules, 1944 should be extended to STEAM by treating it as a by-product or whether the restriction envisaged under Rule 57-C should be applied for availing credit on inputs used in or in relation to the manufacture of STEAM by treating it as a final product as STEAM is exempted from duty? - Whether for denial of credit under Rule 57-C of the erstwhile Central Excise Rules, 1944 the inputs must be directly linked to the final product? - Held that - upon a co-joint reading of Rule 57C and Rule 57CC and Rule 57D it thus emerges that full input credit is to be availed by the assessee in cases covered under Rule 57D that is where the waste , refuse , by-product or intermediate product emerges but at the same time is chargeable to nil rate of duty or is exempt from payment of duty - off gases / lean gases having been obtained by way of a technological necessity and their use to generate heat that was employed by the assessee to generate steam from water rendered Rule 57C and 57CC wholly inapplicable to the facts of the present case despite the fact that steam was a final product - decided in favor of assessee. Reference allowed.
Issues Involved:
1. Whether steam should be treated as a final product when it is manufactured through a conscious activity. 2. Whether the benefit of Rule 57-D (1) of the Central Excise Rules, 1944 should be extended to steam by treating it as a by-product or whether the restriction under Rule 57-C should be applied for availing credit on inputs used in the manufacture of steam. 3. Whether for denial of credit under Rule 57-C of the Central Excise Rules, 1944 the inputs must be directly linked to the final product. Issue-wise Detailed Analysis: 1. Steam as a Final Product: The Tribunal concluded that steam generated by the assessee was a final product. The assessee manufactured Carbon Black using Carbon Black Feed Stock (CBFS), which also resulted in the production of 'off gases'/'lean gases' as a by-product. These gases contained Carbon Monoxide, which was burnt to generate heat. This heat was then used to produce steam. The Tribunal found that no part of CBFS was used directly in the manufacture of steam. Therefore, the steam generated was not considered a direct result of CBFS usage. The Tribunal's reasoning was that the manufacturing process of Carbon Black was complete before the generation of steam, and hence, steam was a separate final product. The High Court agreed with this reasoning and confirmed that steam should be treated as a final product. 2. Application of Rule 57-D (1) vs. Rule 57-C: The Tribunal held that the benefit of Rule 57-D (1) should be extended to steam by treating it as a by-product. Rule 57-D (1) states that credit should not be denied on the ground that part of the inputs is contained in any waste, refuse, or by-product. The Tribunal found that 'off gases'/'lean gases' were a by-product of the Carbon Black manufacturing process and not a final product. Therefore, the use of these gases to generate steam did not amount to using CBFS to manufacture an exempted product. The High Court upheld this view, stating that the applicability of Rules 57-C and 57-CC did not arise since 'off gases'/'lean gases' were by-products. Thus, the assessee was entitled to the benefit of Rule 57-D (1). 3. Direct Linkage of Inputs to Final Product for Credit Denial: The Tribunal reasoned that for the denial of credit under Rule 57-C, it must be shown that the duty-paid input was used in the manufacture of the final product, which is exempt from duty. In this case, the entire quantity of CBFS was used in the manufacture of Carbon Black, and no part of it was used directly to manufacture steam. The High Court supported this reasoning, stating that the process of manufacturing Carbon Black was separate from the process of generating steam. Therefore, the necessary pre-condition for the application of Rule 57-C was not met. The High Court also referenced similar cases, such as Rallis India Ltd. vs. Union of India and Union of India vs. Hindustan Zinc Ltd., to support this view. Conclusion: The High Court concluded that steam should be treated as a final product, and the benefit of Rule 57-D (1) should be extended to it by treating it as a by-product. The necessary pre-condition for the application of Rule 57-C was not met as no part of CBFS was used directly in the manufacture of steam. Therefore, the assessee was entitled to the full input credit on CBFS. The reference was answered in favor of the assessee and against the revenue.
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