2007 (11) TMI 276 - SC - Central Excise

Whether Lean Gas produced by Gas Authority of India Ltd. (GAIL) is a manufactured marketable final product or by-product - alleged by the Department that assessee had cleared Lean Gas in bulk u/ch 2611.21 claiming nil rate of duty - no clearance has been given by Committee in favour of the Central Govt. which had preferred the present civil appeals - appeals filed by dept. are dismissed on the factual aspect, namely, that in the SCN, there is no allegation that Lean Gas is the final product.

Summary

Issues:
Determining whether Lean Gas produced by Gas Authority of India Limited (GAIL) is a manufactured marketable final product or a by-product.

Analysis:
The civil appeals filed by the Department under section 35L of the Central Excise Act, 1944 raised the question of whether Lean Gas produced by GAIL is a manufactured marketable final product or a by-product. The Department issued a show cause notice to the assessee alleging that Lean Gas was a by-product after a manufacturing process on Natural Gas to extract LPG. The Department contended that the assessee was not entitled to Modvat credit under Rule 57CC as Lean Gas was considered a final product. However, the assessee claimed Modvat credit under Rule 57D, which stated that credit shall not be denied or varied in certain circumstances, including when part of the inputs becomes waste or a by-product during the manufacturing process.

The Department argued that Rule 57CC applied as Lean Gas was a final product, while the assessee claimed it was a by-product, thus entitling them to Modvat credit under Rule 57D. Rule 57CC dealt with the adjustment of credit on inputs used in exempted final products and required the manufacturer to pay an amount equal to 8% of the price charged for the sale of exempted final products. On the other hand, Rule 57D protected the credit of specified duty in certain circumstances, including when inputs became waste or a by-product during manufacturing.

The Supreme Court clarified that the crucial issue was whether Lean Gas was a by-product or a final product. The Court noted that the show cause notice itself treated Lean Gas as a by-product, which raised doubts about denying Modvat credit to the assessee. The Court emphasized that the show cause notice forms the foundation of a demand under the Central Excise Act and if it categorizes the product as a by-product, there is no basis to deny the Modvat credit. The Court dismissed the appeals based on the factual aspect that the show cause notice did not allege Lean Gas to be a final product, without expressing an opinion on the larger legal question. The Court highlighted the importance of resolving disputes before litigation and concluded the judgment by dismissing the appeals without costs.

In conclusion, the Supreme Court's judgment focused on the interpretation of whether Lean Gas was a by-product or a final product, emphasizing the significance of the show cause notice in determining the entitlement to Modvat credit under the Central Excise Act. The Court's decision was based on the factual aspect that the show cause notice treated Lean Gas as a by-product, leading to the dismissal of the appeals filed by the Department.