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TMI Blog2018 (2) TMI 819X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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? (iii) 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?" The Tribunal by its final order dated 7.3.2003 had allowed the appeal filed by the assessee and held that the 'off gases' / 'lean gases' were a by-product obtained in the manufacture of Carbon Black from Carbon Black Feed Stock (CBFS in short). The Tribunal had relied upon Rule 57D(1) of the Central Excise Rules, 1944 (hereinafter referred to as the Rules) and held that credit shall not be denied to the assessee on any part of the input i.e. CBFS by attributing its utilization in manufacture of 'steam' cleared at nil rate of duty. The assessee manufactured Carbon Black, that are goods classifiable under Chapter 28 of the First Schedule to the Central Excise Tariff Act, 1985 (hereinafter referred to as the Tariff Act), using CBFS as raw material/input. In that process, RFO/LSHS/LDO/FO was used as fuel. The assessee, subjected CBFS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Rule 57C or 57CC of the Rules, it was a pre-requisite that the input on which the input credit had arisen should have been used to manufacture the exempted product alongwith a dutiable product. The Tribunal further reasoned that by insertion of Rule 57CC to the Rules there was no intention to deprive the assessee of benefit available under Rule 57D(1) of the Rules to a 'by-product', 'waste' or 'refuse'. Thus no part of input credit availed was to be disallowed. Thus, essentially the Tribunal has reasoned that duty paid CBFS on which the input credit had arisen got consumed in the manufacture of Carbon Black. At the end of that manufacturing process, the assessee obtained 'off gases' / 'lean gases' as a 'by-product'. According to the reasoning of the Tribunal, the manufacturing process was complete at that stage with the manufacture of Carbon Black. 'Off gases' / 'lean gases' were generated as a 'by-product'. The application of Rules 57C and 57CC was examined by the Tribunal in the context of the aforesaid manufacturing activity alone. According to the Tribunal the applicability of Rules 57C and 57CC d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll pay an amount equivalent to twenty per cent of that value of such product at the time of clearance of the said product by adjustment in the credit account maintained under sub-rule (3) of rule 57G or sub-rule (5) of rule 57T or in the accounts maintained under rule 9 or sub-rule (1) of rule 173G or if such adjustment is not possible for any reason by cash recovery from the manufacturer availing of the credit under rule 57-A. Explanation:- For removal of doubts it is hereby declared that the provisions of this rule shall apply notwithstanding the fact that the inputs on which credit has been taken are not actually used or contained in the products referred to in this rule." 57D. Credit of duty not to be denied or varied in certain circumstances - (1) Credit of specified duty shall not be denied or varied on the ground that part of the inputs is contained in any waste, refuse or by-product arising during the manufacture of the final product, or that the inputs have become waste during the course of manufacture of the final product, whether or not such waste or refuse or by-product is exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1996 to August 1996 by virtue of Rule 57CC, even if 'steam' were to be treated as not the final product, yet, 'steam' being 'any product' manufactured by the use of duty paid CBFS, the assessee could not have claimed input credit on the CBFS proportionate to the quantity of CBFS utilised in the manufacture of such 'steam'. He further submits, the assessee obtained 'steam' from 'off gases' / 'lean gases' that in turn had admittedly been obtained from duty paid CBFS. Also, because 'steam' was a final product and the assessee cleared it without payment of duty, therefore it became liable to proportionate reversal of input credit on CBFS utilised to manufacture 'steam'. Responding to the aforesaid submissions, Sri Badri Lakshmikumaran and Sri Nishant Mishra, learned counsel for the assessee submit that the assessee had established it's unit to manufacture only Carbon Black from CBFS and not to manufacture 'steam'. It had subjected the entire quantity of CBFS to thermal cracking process only to manufacture Carbon Black. No quantity of CBFS survived the thermal cracking process nor could it be identifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 'steam' as noted above. The revenue's understanding appears to be, since the assessee obtained 'steam' and Carbon Black as ultimate final products and because it had used CBFS as an input, at the first stage, therefore, some part of CBFS must have necessarily been consumed in the manufacture of 'steam'. This reasoning is flawed. It completely overlooks or discounts the fact that the manufacture of Carbon Black was complete at one stage prior to production of heat and that neither steam nor heat was produced in the manufacture of Carbon Black. In fact, 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'. Clearly, 'steam' is a final product. Question no. 1 is answered accordingly. As noted above, the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed before a disallowance of input credit may be made under Rules 57C or 57CC. First, 'use' of the duty paid input 'in the manufacture of' a 'final product' or 'any product' as the case may, must be established. Then such 'final product' or 'other product' must itself either be exempt from payment of excise duty or be chargeable at nil rate of duty. In the instant case there is no doubt that 'steam' was exempt from payment of duty. However, it remains to be seen whether it was a final product obtained from duty paid input. As to the scheme of the Rules, 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. In the instant case, the Tribunal has correctly examined the issue on facts and thereafter found that 'off gases'/'lean gases' were the 'by-product' in the manufacture of Carbon Black b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n utilised to generate 'steam'. Thus, in view of the above, there never arose a situation to apply Rule 57C or 57CC of the Rules. Those Rules would be of relevance when two products emerge from a single process (upon utilisation of a duty paid input), one of which is either exempt from duty payment or is cleared at nil rate of duty. We also find that Bombay High Court in the case of Rallis India Ltd. Vs. Union of India(supra) had dealt with a similar controversy. In that case that assessee had engaged in the manufacture of Gelatin from animal bones of bovine animals. In that process the assessee treated animal bone containing both organic material (protein) as also inorganic material phosphorus with hydrochloric acid. Upon such process the organic substance namely protein being insoluble in water resulted in 'Ossien' while inorganic substance being water soluble, formed the "mother liquor/phosphoryl liquor". Insoluble 'Ossien' was further processed to manufacture Gelatin which was cleared on payment of excise duty while inorganic substance/'mother liquor' being waste liquid was to be thrown away. 'Mother liquor' being hazardous to environ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words, in the present case, the petitioner is not required to reverse the credit of duty on HCL at the time of clearance of the waste mother liquor and consequently there would not be any obligation to pay presumptive amount under Rule 57CC for not maintaining separate account. 27. The fact that the waste mother liquor arising in the manufacture of gelatin was further processed to manufacture exempted phosphoryl 'A' and 'B' would not attract Rule 57CC, because, if Rule 57 CC was not applicable at the time of clearance of the waste mother liquor arising in the manufacture of dutiable gelatin, then the said rule cannot be applied merely because mother liquor was further processed to manufacture exempted final product, namely phosphoryl 'A' & 'B'. In other words, liability to pay the presumptive amount under Rule 57CC would arise only if the waste mother liquor is held to be a final product. It is not even the case of the revenue that the waste mother liquor arising in the manufacture of gelatin is a final product. Therefore, in the facts of the present case, if Rule 57CC was not applicable at the time of clearance of waste mother liquor, then Rule 57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the manufacture of exempted final product. In the present case, mother liquor arising in the manufacture of dutiable gelatin is a waste and not an exempted final product. Therefore, in the light of Rule 57-D the petitioner was entitled to the entire credit availed and there was no obligation to reverse credit or pay presumptive amount under Rule 57CC was not applicable at the time of clearance of the waste mother liquor arising in the manufacture of gelatin, then the said Rule cannot be made applicable merely because the said waste mother liquor was utilized in the manufacture of exempted final product viz. phosphoryl 'A' and 'B'." Then, in the case of Union of India Vs. Hindustan Zinc Ltd. reported in 2014 (303) E.L.T. 321 (S.C.), the Supreme Court specifically affirmed the judgment of the Bombay High Court in the case of Rallis India Ltd. Vs. Union of India(supra). The Supreme Court held as below:- "25. These arguments may seem to be attractive. However, having regard to the processes involved, which is already explained above and the reasons afforded by us, we express our inability to be persuaded by these submissions. We have already noticed above that in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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