2014 (5) TMI 253 - SC - Central Excise

Modvat/ Cenvat Credit for the use of inputs in the manufacture of final products which are exempt or subject to nil rate of duty and the requirement of the assessee to maintain separate accounts - by-product - sulphuric acid was cleared to fertilizer plants under exemption - exemption of the finished goods subsequent to availment of cenvat credit - whether the Respondents are liable to pay 8% excise duty - Held that - Technologically, commercially and in common parlance, sulphuric acid is treated as a by-product in extraction of non-ferrous metals by companies not only in India but all over the world. That is the reason why the department accepted the position before the Tribunal that sulphuric acid is a by-product. It was submitted that the extraction of zinc from the ore concentrate will inevitably result in the emergence of sulphur dioxide as a technological necessity. It is not as though the Respondents can use lesser quantity of zinc concentrate only to produce the metal and not produce sulphur dioxide. In other words, a given quantity of zinc concentrate will result in emergence of zinc sulphide and sulphur dioxide according to the chemical formula on which respondents have no control. 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 sulphuric acid. - Once we proceed keeping in mind the aforesaid factual, technological and commercial position available on the records, it has to be accepted that the respondents have consumed the entire quantity of zinc concentrate in the production of zinc. The respondents maintained the inventory of zinc concentrate for the production of zinc and we agree with the submission of the respondents that there was no necessity and indeed it is impossible, to maintain separate records for zinc concentrate used in the production of sulphuric acid. - 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. 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. - 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. 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. - Following decision in GAIL 2007 (11) TMI 276 - SUPREME COURT , decided in favor of assessee.

Issues Involved:
1. Entitlement of Respondents/Assessees to Modvat/Cenvat Credit for inputs used in the manufacture of exempt or nil duty final products.
2. Requirement for assessees to maintain separate accounts for inputs used in dutiable and exempted goods.
3. Liability arising from failure to maintain such separate accounts.
4. Applicability of Rule 57CC of the Central Excise Rules, 1944, Rule 57AD of the Central Excise Rules, 2000, and Rule 6 of the Cenvat Credit Rules, 2004.
5. Validity of the show cause notice issued to the assessee.
6. Constitutional validity of Rule 6 of the Cenvat Credit Rules, 2004.

Issue-Wise Detailed Analysis:

1. Entitlement to Modvat/Cenvat Credit:
The central issue across all appeals was whether the respondents were entitled to Modvat/Cenvat Credit on inputs used in the manufacture of final products that were either exempt from duty or subject to nil duty. The High Court had previously ruled in favor of the respondents, interpreting Rule 57CC and Rule 57D to allow such credit. The Supreme Court upheld this interpretation, emphasizing that the respondents had used the entire quantity of zinc concentrate for zinc production, with sulphuric acid emerging as a by-product due to technological necessity. The Court noted that sulphuric acid should be treated as a by-product, not a final product, thereby entitling the respondents to the credit.

2. Requirement to Maintain Separate Accounts:
The Revenue argued that the respondents were required to maintain separate accounts for inputs used in the production of both dutiable and exempted goods under Rule 57CC. The Supreme Court, however, agreed with the High Court's interpretation that such a requirement did not apply in cases where the by-product (sulphuric acid) emerged as a technological necessity and not as a final product. The Court held that the respondents had maintained appropriate records for zinc concentrate used in zinc production, making it impossible and unnecessary to maintain separate records for by-products.

3. Liability for Failure to Maintain Separate Accounts:
The Revenue contended that the respondents should pay 8% excise duty on the value of sulphuric acid sold to fertilizer plants under exemption, as per Rule 57CC. The Supreme Court rejected this argument, ruling that the mischief of recovery of 8% under Rule 57CC on exempted sulphuric acid was not attracted because the by-product status of sulphuric acid did not necessitate separate accounts.

4. Applicability of Relevant Rules:
The Supreme Court examined the applicability of Rule 57CC, Rule 57AD, and Rule 6. The Court concluded that Rule 57CC did not apply to by-products like sulphuric acid, which emerged as a technological necessity. The Court emphasized that Rule 57D, which states that credit should not be denied for inputs contained in any waste, refuse, or by-product, was applicable. The Court held that interpreting Rule 57CC to apply to by-products would obliterate the distinction between by-products and final products, which was not the legislative intent.

5. Validity of the Show Cause Notice:
The Revenue argued that the High Court should not have entertained the writ petitions challenging the show cause notice at a premature stage. The Supreme Court dismissed this argument, noting that the writ petitions also challenged the vires of Rule 57CC, which justified their consideration. The Court found that addressing the constitutional validity of the rule at the show cause stage was appropriate.

6. Constitutional Validity of Rule 6:
The respondents had challenged the constitutional validity of Rule 6 of the Cenvat Credit Rules, 2004. The High Court did not rule on this issue directly but interpreted the rule in a manner that avoided constitutional issues. The Supreme Court upheld this approach, agreeing with the High Court's interpretation that the rule did not apply to by-products like sulphuric acid.

Conclusion:
The Supreme Court dismissed the appeals filed by the Revenue, affirming the High Court's interpretation of the relevant rules. The Court held that the respondents were entitled to Modvat/Cenvat Credit for inputs used in the manufacture of by-products like sulphuric acid, and the requirement to maintain separate accounts did not apply in this context. The Court also upheld the validity of the writ petitions challenging the show cause notices and the interpretation of Rule 6 of the Cenvat Credit Rules, 2004.

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