Page 1 C.A. NO. 8621 of 2010

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8621 OF 2010

Union of India & Ors. ….. Appellant(s)

Versus

M/s. Hindustan Zinc Ltd. …. Respondent (s)

WITH

C.A. No. 1181 of 2012

C.A. No. 2337 of 2011

C.A. No. 5322 of 2010

C.A. No. 8622 of 2010

C.A. No. 8623 of 2010

C.A. No. 8624 of 2010

C.A. No. 8625 of 2010

C.A. No. 8626 of 2010

C.A. No. 8627 of 2010

C.A. No. 8628 of 2010

C.A. No. 8629 of 2010

C.A. No. 8630 of 2010

C.A. No. 8631 of 2010

J U D G M E N T

A.K. SIKRI, J.

1.All these appeals raise identical question of law, which has

arisen in almost similar circumstances. In fact, the issue involved

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was decided by the High Court in a batch of Writ Petitions filed by

M/s. Hindustan Zinc vide judgment dated 23.1.2007 against which

SLP under Article 136 of the Constitution was filed in which leave

has been granted. In other case, same issue is decided by the

CESTAT against which statutory appeal is preferred. That is

precisely the reason that all these appeals were bunched together

and collectively heard.

2.At the outset, the controversy involved may be reflected by

pointing out that the questions for consideration are as to the

entitlement of the Respondents/ assessees to 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 with

respect to inputs used in dutiable goods as well as exempted

goods and the liability arising on the failure of the assessee to

maintain such separate accounts. In Civil Appeal Nos. 8621-8630

of 2010, we are concerned with sulphuric acid. In Civil Appeal No.

8631 of 2010, it is caustic soda flakes and trichloro ethylene. In

Civil Appeal No. 2337 of 2011, the product is again sulphuric acid

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and in the case of Civil Appeal No. 5322 of 2010 and the other

connected matter of M/s Rallis India Ltd, it is Phosphoryl A and

Phosphoryl B. The issue is as to whether the Assessees

(respondents) are entitled to Modvat/ Cenvat Credit on inputs

used in the manufacture of the aforementioned exempted (or

subject to NIL rate of duty) final products.

3.In all these appeals filed by the Revenue, it has taken the

position with the common contention as to whether the

Respondents are liable to pay 8% excise duty as an amount under

Rule 57CC of the Central Excise Rules, 1944 or 57AD of the

Central Excise Rules, 2000 or Rule 6 of the Cenvat Credit Rules,

2004 (hereinafter referred to as 'Rules') on the value of by-product

namely sulphuric acid which was cleared to fertilizer plants under

exemption in terms of the bonds executed by the fertilizer plants.

4.At this stage we would describe the manufacturing process in all

three cases and the facts leading to the filing of the present

appeal.

Hindustan Zinc Ltd. (C.A. No. 8621-8630/2010)

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i) Hindustan Zinc Ltd. obtained zinc ore

concentrate from the mines on the payment of excise

duty which is used as an input for the production of

zinc. Zinc ore is predominantly available as Zinc

Sulphide (ZnS).

ii)When ZnS is heated (calcined) at high

temperature in the presence of oxygen, zinc oxide

(ZnO) and sulphuric acid are produced. Zinc Oxide is

further oxidised to produce zinc. Sulphur obtained as

a technological necessity is a pollutant and is,

therefore, converted into sulphur dioxide in the

presence of catalysts like Vanadium Pentaoxide &

Hydrogen Peroxide. Sulphuric acid is converted into

sulphur and the respondent does not take any Cenvat

Credit on the inputs used after the emergence of

sulphur dioxide. The sulphuric acid produced as a by-

product is sold on payment of excise duty to various

industries. Some quantities of sulphuric acid are sold

to fertilizer plants in terms of notification No. 6/2002-

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CE on the execution of bonds by the fertilizer plants

to the satisfaction of the excise authorities. The said

sulphuric acid is used for the production of zinc.

iii)The excise department took a view that in terms

of Rule 57 CC of the Rules, the respondents were

obliged to maintain separate accounts and records for

the inputs used in the production of zinc and

sulphuric acid and in the absence of the same the

respondents were obliged to pay 8% as an amount on

the sale price of sulphuric acid to the fertilizer plants

in terms of Rule 57 CC. The respondent defended the

more by contending that the very purpose of the

grant of exemption to sulphuric acid was to keep the

input costs at the lowest for the production of

fertilizers during the relevant period. Fertilizers

themselves were wholly exempted from the payment

of excise duty because the government wanted the

farmgate price to the farmer should be at the lowest.

In fact, the government grants subsidies to the

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fertilizer plants for the difference between the cost of

production and sale price determined by the

government. It was their defence that any duty

demand on the sulphuric acid will defeat the very

purpose of grant of exemption and make the fertilizer

cost higher than the desirable level. In such a

scenario, such higher cost will have to be

compensated by the government as subsidy.

iv)Respondent challenged the show cause notices

by filing writ petitions under Article 226 before the

Rajasthan High Court, primarily challenging the vires

of Rule 57 CC on the ground that the Central

Government by subordinate legislation, can not fix

rates of duties which is the prerogative of the

Parliament under Section 3 of the Central Excise Act,

1944 read with Central Excise Tariff Act, 1975. Other

contentions regarding the vires of Rule 57 CC were

also raised. As an alternative, it was pleaded that

even if Rule 57 CC is to be held as intra vires, the

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demand raised in the show cause notices will not

survive on proper interpretation of Rule 57CC of the

Rules and hence is to be quashed. The High Court

decided the petition in favour of the respondents on

the interpretation of Rule 57CC and Rule 57D itself,

without going into the question relating to the vires.

Department is in appeal before this Court against this

judgment.

Birla Copper (C.A. NO. 2337/2011)

i)The manufacturing process of copper from the

copper ore concentrate is similar to that of zinc and

the emergence of sulphuric acid as a by-product was

conceded by the department before the Tribunal. Here

again, Birla Copper were selling the by-product

sulphuric acid to various industries on payment of

duties and clearing the sulphuric acid without

payment of duty to the fertilizer plant based on the

bonds executed by the fertilizer plants. The Tribunal in

this case decided the matter in favour of the

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respondent following its own judgment in the case of

Sterlite Industries India Ltd. v. CCE reported as 2005

(191) ELT 401. In that case Sterlite was also a

manufacturer of copper and a competitor for Birla

Copper using the same process and the Tribunal held

that excise duty was not payable under 57 CC on the

sulphuric acid cleared to fertiliser plants in view of this

court's decision in the case of Swadeshi Polytex Ltd. v.

CCE reported as 1989 (44) ELT 794. The Tribunal also

in the case of Sterlite (supra) held that 57 CC will

apply only when same inputs are being used in

manufacture of two or more final products, one of

which is exempt from payment of excise duty and the

assessee was not maintaining separate account and

separate inventory. In this case, the Tribunal held that

sulphuric acid was not a final product but only a by-

product and hence Rule 57 CC will not apply,

particularly when we read the same in the light of

Rule 57D. Department's appeal is against this order of

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the Tribunal. Significantly, the department has not

disputed the emergence of sulphuric acid as a by-

product. We are also informed that the Department

did not file any appeal challenging the decision of

Sterlite (supra) and the same has been accepted by

the Department. In the present appeal, the contention

of the Department is that the Sterlite (supra) will

apply for the period prior to 1.4.2000 when Rule 57 D

was in force and post 1.4.2000, the Rule was deleted.

Rallis India Ltd. (C.A. No. 5322/2010)

i)Rallis India is engaged in the manufacture of Gelatin

for use in pharmaceutical industry for manufacture of

capsules. Gelatin is produced by reacting Hydrochloric

Acid with bovine animal bones. During the reaction,

the bone converts into ossein which in turn is used to

produce gelatin. The inorganic substances like

phosphorous etc. are washed with water which is

called mother liquor, spent liquor or phosphoral liquor.

When these by-products and waste products are

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cleared without payment of duty, the Excise

Department demanded duty @ 8% in terms of Rule 57

CC. Here again, whether the mother liquor is a waste

product or by-product was not disputed by the

Department before the Tribunal or before the Bombay

High Court. The Tribunal decided the matter against

the assessee by interpretating Rule 57 CC. The same

was challenged before the Bombay High Court, which

has reversed the decision of the Tribunal. The

Department is in appeal against the decision of the

High Court.

The aforesaid narration discloses the identity of the issue in the

three set of appeals. Henceforth, in our discussion, reference

would be to the Hindustan Zinc Ltd., as the respondent.

5.The respondent herein is a Public Limited Company and it was

disinvested in April, 2002. The respondent is engaged in the

manufacture of non-ferrous metals like zinc, lead as well as

Sulphuric Acid and Copper Sulphate. The said products are

chargeable under Chapter Sub-heading No. 2807.00, 7901.10 and

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2833.10 respectively of the First Schedule to the Central Excise

Tariff Act, 1985 respectively among their other products. A show

cause notice was issued on 15.3.2005 to the assessee respondent

for recovery of Rs. 48,39,883/- under Rule 12 of the erstwhile

CENVAT Credit Rules, 2002 and Rule 14 of CENVAT Credit Rules

2004 read with Section 11(e) of the Central Excise Act, 1944 along

with interest and penal provisions.

6.The respondent filed Writ Petition No. 6776 of 2005 before the

High Court, Jodhpur challenging the constitutional validity of Rule

6 of the Cenvat Credit Rules, 2004 as well as the impugned show

cause notice dated 15.3.2005. The respondent submitted in the

said writ petition that Sulphur Dioxide Gas is produced during the

manufacture of Zinc and lead and due to environmental control

requirements, they are prohibited from releasing the same in the

air. Therefore, Sulphur Dioxide is used for manufacture of

Sulphuric Acid which is the input for manufacture of non-ferrous

metals like zinc and lead cannot be considered as common inputs

for manufacture of Sulphuric Acid in as much as Sulphur is the

only component in concentrate which goes into manufacture of

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Sulphuric Acid. Further, the respondent contended that Rule 6 of

the Cenvat Credit Rules is beyond the power of Central

Government and hence ultra vires the provisions of the Act. The

constitutional validity of Rule 57CC of the erstwhile Modvat Credit

Rules was also challenged. It was stated that the Tribunal in the

judgment in the matter of Binani Zinc Ltd. v. Commissioner of

Central Excise, Cochin – 2005 (187) E.L.T. 390 (Tri. - Bang.) has

held that Rule 57CC does not make any distinction between

exempted final product and exempted bye-product and hence, no

useful purpose would be served by approaching the Tribunal.

7.The appellant contested the said Writ Petition by way of counter

affidavit in which the appellant submitted that the respondent -

assessee was not maintaining separate inventory and account for

the receipt and use of inputs in relation the manufacture of final

product i.e. Sulphuric Acid cleared at Nil rate of duty as required in

terms of provisions of Rule 6(2) of the Rules. That it was

mandatory to follow the provisions of the Rules if common inputs

were used for the manufacture of dutiable final product and

exempted goods. It was also contended that assuming without

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admitting that Sulphuric Acid is by-product, it was mandatory to

reverse an amount equal to 8% of the value of exempted goods

as the words used in the provisions of Rule 6 of the Rules “is

exempted goods and not exempted final product”. By way of

preliminary submission, it was pleaded that the Writ Petition is

pre-mature and the assessee had not even replied to the show

cause notice.

8.The High Court after examining the manufacturing process as

well as Rule position, came to the conclusion that prohibition

against claiming Modvat Credit on exempted goods or subject to

nil rate of duty applies in case where such exemption from

payment of duty or nil rate of duty on end product is predictably

known at the time the recipient of inputs is entitled to take credit

of duties paid on such inputs. The fact that due to subsequent

notification or on contingency that may arise in future, the end

product is cleared without payment of duty due to exemption or

nil rate of duty does not affect the availing of modvat credit on

the date of entitlement. If on the date of entitlement, there is no

illegality or invalidity in taking credit of such modvat/ Cenvat

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Credit, the right to utilize such credit against future liability

towards duty become indefeasible and is not liable to be reversed

in the contingency discussed above.

9.On these findings, the High Court has allowed the Writ Petitions

filed by the respondent-Hindustan Zinc. In the process there is a

detailed discussion of the relevant rules explaining the scheme

contained therein; on the aspect of payment of 8% excise duty

under Rule 57 CC of Central Excise Rules, 1944, 57AD of the

Central Excise Rules, 2000 and Rule 6 of the Cenvat Credit Rules,

2004.

10.From the aforesaid narration, it becomes apparent that the

respondent wants to avail Modvat Credit on duties paid on inputs

used at smelter by it vis-a-vis the part of sulphuric acid produced

by it in its sulphuric acid plant and sold to IFFCO, a manufacturer

of fertilizer, who is entitled to avail concession of acquiring

sulphuric acid used by it as an input in manufacture of fertilizers

on payment of duties in terms of the exemption notifications

issued from time to time. So far as the sulphuric acid is

concerned, as an end product it is chargeable to duty under tariff

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head 28. The rate of duty provided under the Tariff Act is 16% ad

velourm. There is no exemption as such to the manufacture from

the payment of duty on manufacture of sulphuric acid when

removed. Under general exemption No. 66 issued under sub-

section 1 of Section 5A of the Central Excise Act the Central

Government has exempted exciseable goods of the description

specified in (3) of the table appended to the said Exemption

Order.

11.In so far as sulphuric acid which is used in the manufacture of

fertilizers is concerned, nil duty is provided. However, table

indicates that it is subject to condition No. 5. Condition No. 5 is

mentioned in Annexure appended to General Exemption No. 66

which reads as under:-

“5.Where such use is elsewhere than in the factory

of production the exemption shall be allowed if the

procedure laid down in the Central Excise (Removal of

Goods at Concessional Rate of Duty for manufacture

of Excisable goods) Rules, 2001, is allowed.”

12.The appellant contends that clearance of sulphuric acid as a

by-product to fertilizer plants attract nil rate of duty in terms of

notification no. 6/2002-CE, though on the basis of bonds posted by

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the fertilizer plants, but nonetheless, the goods are cleared under

total exemption or nil rate of duty and hence 57CC is attracted. It

is their contention that Rule 57 D has no application.

13.Since the answer depends on the question as to whether Rule

57CC applies or Rule 57D is attracted, as well as on the correct

interpretation of these Rules, we reproduce these rules, at this

juncture:-

Rule 57CC -

“Adjustment of credit on inputs used in exempted

final products or maintenance of separate inventory

and accounts of inputs by the manufacturer, (1)

Where a manufacturer is engaged in the manufacture

of any final product which is chargeable to duty as

well as in any other final product which is exempt

from the whole of the duty of excise leviable there on

or is chargeable to nil rate of duty and the

manufacturer takes credit of the specified duty on

any inputs (other than inputs used as fuel) which is

used as ordinarily used in or in relation to the

manufacture of both the aforesaid categories of final

products, whether directly or indirectly and whether

contained in the said final products or not, the

manufacture shall, unless the provisions of sub-rule

(9) are complied with, pay an amount equal to 8% of

the price (excluding sales tax and other taxes, if any,

payable on such goods) of the second category of

final products charged by the manufacturer for the

sale of such goods at the time of their clearance from

the factory.

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The amount mentioned in sub-rule(1) shall be paid by

the manufacturers by adjustment in the credit

account maintained under sub-Rule(7) of Rule 57G or

in the accounts maintained under Rule 9 or sub-Rule

173G and if such adjustment is not possible for any

reason, the amount shall be paid in cash by the

manufacturer availing of credit under Rule 57A.

The provisions of sub-rule(1) shall not apply to final

products falling under Chapter 50 to 63 of the

Schedule to the Central Excise Tariff Act, 1985 (5 of

1986).

(4)The provisions of sub-rule (1) shall also not apply

to-

(a)Articles of plastics falling within Chapter 39;

(b)Tyres of a kind used on animal drawn

vehicles or handcarts and their tubes, falling

within Chapter 40;

(c)Black and white television sets, falling

within Chapter 85 and

(d)News print, in rools or sheets, falling within

Chapter heading No. 48.01; which are exempt

from the whole of the duty of excise leviable

thereon or chargeable to nil rate duty.

(5)In the case of final products referred to in sub

rule (3) or sub-rule(4) and excluded from the

provisions of sub-rule(1), the manufacturer shall pay

an amount equivalent to the credit of duty

attributable to inputs contained in such final products

at the time of their clearance from the factory.

The provisions of sub-rule (1) shall also not apply to

final products which are exported under bond in terms

of the provisions of Rule 13.

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The provisions of sub-rule (1) shall apply even if the

inputs on which credit has been taken are not actually

used or contained in any particular clearance of final

products.

If any goods are not sold by the manufacturer at the

factory gate but are sold from a depot or from the

premises of a consignment agent or from any other

premises, the price (excluding sales tax and other

taxes, if any, payable) at which such goods are

ordinarily sold by the manufacture from such depot or

from the premises of a consignment agent or from

any other premises shall be deemed to be the price

for the purpose of sub-Rule (1).

In respect of inputs (other than inputs used as flue)

which are used in or in relation to the manufacturer of

any goods, which are exempt from the whole of the

duty of excise leviable thereon or chargeable to nil

rate of duty, the manufacturer shall maintain separate

inventory and accounts of the receipt and use of

inputs for the aforesaid purpose and shall not take

credit of the specified duty paid on such inputs.”

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 duty or is not specified as a

final product under Rule 57A.”

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14.Mr. Parasaran, the learned Solicitor General, opened his

submissions by challenging the very approach of the High Court in

entertaining the writ petitions as according to him, stage therefor

had not ripened. His contention in this behalf was that merely a

show cause notice was issued and no final decision was taken on

the said show cause notice. However, instead of showing cause,

writ petitions were filed seeking quashing of the show cause

notice which should have been dismissed as premature. He

referred to certain judgments of this court as well, wherein it is

held that High Court, normally, should not entertain writ petition

questioning the validity of the show cause notice.

15.On merits, the learned Solicitor General argued that the

interpretation furnished by the High Court to Rule 57CC of the

Modvat Rules and Rule 6 of CENVAT Rules, respectively was not

correct. The High Court was required to apply literal rule of

interpretation when the language of these rules is clear and

unambiguous.

16.Before we advert to the interpretations of the aforesaid

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provisions and to discuss the argument of the Union of India as to

whether literal interpretation is to be given to Rule 57CC, it would

be necessary to understand the properties of sulphuric acid. From

what is explained above including the use of sulphuric acid for the

production of zinc, it becomes apparent that sulphuric acid is

indeed a by-product. In fact, it is so treated by the respondents in

their balance sheet as well as various other documents which

were filed by the respondents in the courts below. It is also a

common case of the parties that Hindustan Zinc Limited and Birla

Copper were established to produce zinc and copper respectively

and not for the production of sulphuric acid. It was argued by the

learned Counsel for the respondents, which could not be disputed

by the learned Solicitor General, that emergence of sulphur

dioxide in the calcination process of concentrated ore is a

technological necessity and then conversion of the same into

sulphuric acid as a non-polluting measure cannot elevate the

sulphuric acid to the status of final product. Technologically,

commercially and in common parlance, sulphuric acid is treated

as a by-product in extraction of non-ferrous metals by companies

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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.

17.In these circumstances the position taken now by the appellant

that sulphuric acid cannot be treated as a by-product cannot be

countenanced. Mr. S.K. Bagaria, learned Senior Counsel appearing

for the respondent while explaining the manufacturing process in

detail, also pointed out that the ore concentrates (Zinc or Copper)

are completely utilised for the production of zinc and copper and

no part of the metal, zinc or copper forms part of the sulphuric

acid which is cleared out. 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.

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18.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.

19.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.

20.Let us now examine the position contained in Rule 57 CC on

the touchstone of the aforesaid position. No doubt, Rule 57CC

requires an assessee to maintain separate records for inputs

which are used in the manufacture of two or more final products

one of which is dutiable and the other is non-dutiable. In that

event, Rule 57 CC will apply. For example, a tyre manufacturer

manufactures different kinds of tyres, one or more of which were

exempt like tyre used in animal carts and cycle tyre, where car

tyres and truck tyres attract excise duty. The rubber, the

accelerators, the retarders, the fillers, sulphur, vulcanising agents

which are used in production of tyres are indeed common to both

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dutiable and exempt tyres. Such assesses are mandated to

maintain separate records to avoid the duty demand of 8% on

exempted tyres. But when we find that in the case of the

respondents, it is not as though some quantity of zinc ore

concentrate has gone into the production of sulphuric acid,

applicability of Rule 57 CC can be attracted. As pointed out above,

the entire quantity of zinc has indeed been used in the production

of zinc and no part can be traced in the sulphuric acid. It is for this

reason, 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. We,

therefore, agree with the High Court that 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.

21.As already pointed out, argument of the learned Solicitor

General was that Rule 57CC and Rule 6 of the Modvat/ CENVAT

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Rules respectively require the literal rule of interpretation which

needs to be applied, as the language of these was unambiguous

in this behalf. We may record that as per the learned Solicitor

General, the provisions of Rule 57CC or Rule 6 envisage common

use of inputs in two final products i.e. one dutiable and other

exempted from the applicability of the same. He submitted that

when two final products emerge out of use of common inputs, one

excisable and the other exempt, the provisions will apply. The

question of intention of the assessee to manufacture the

exempted product is not relevant. It may be intended or

unintended but if what results in the course of a manufacturing

process is a “final product” falling within the meaning of the said

provisions, the provisions will apply in full with the attendant

consequences. He also argued that Rule 57D uses the words

'waste and refuse' alongwith “by-products”. The word 'by-product'

will necessarily have to take its colour and meaning from the

accompanying words “waste and refuse”. “By-products” cannot, in

any event, mean “final products”. This Rule only means that

Modvat Credit cannot be denied on the ground that in the course

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of manufacture, non excisable goods also arise.

22.Elaborating this contention, the learned Solicitor General

submitted that the words “final products” in the context of Modvat

and Cenvat Credit have to be understood giving the meaning as

assigned to it in the Modvat/ Cenvat Rules. Rule 57A inter alia

states that the provisions of this Section shall apply to such

finalised excisable goods (referred to in that section as final

products). Again, Rule 2(c) of the Cenvat Credit Rules, 2002

defines “final products” as meaning excisable goods

manufactured or produced from inputs except matches. Rule 2(h)

of the Cenvat Credit Rules, 2004 defines “final products” as

meaning excisable goods manufactured or produced from input,

or using in input service. Thus, final products referred to in the

aforesaid provisions can only mean to be excisable goods

produced or manufactured. In the present set of cases, sulphuric

acid, caustic soda flakes, trichloro ethylene and Phosphoryl A and

Phosphoryl B are excisable goods manufactured and produced in

India falling under different headings of the Central Excise Tariff

Act. The submission was that if these products are exempt or

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subject to NIL rate of duty, then the inputs on which Modvat/

Cenvat Credit are claimed used in the manufacture of the

aforesaid final products will attract the rigor of Rule 57CC/ Rule 6

of the Modvat/ Cenvat Credit Rules.

23.In this very direction, his further submission was that the term

“by-products” is not defined either in the Act or in the Rules.

Dictionary meanings cannot be resorted to in this case as it would

then mean that final products would be treated as by-products

defeating the plain language of Rule 57CC and Rule 6 which are

applicable to final products. The only test is “excisability of goods

manufactured or produced” and only if the requirements of this

test are satisfied, the goods can be 'final products' and never 'by-

products'. On this basis, the learned Solicitor General submitted

that even an admission made before the Tribunal in the Birla

Copper case of the goods being a 'by-product', cannot be relied on

by the respondent.

24.While pleading that the aforesaid interpretation to these Rules

be accepted by this Court, submission of Mr. Parasaran was that in

such an eventuality the judgment in the case of Swadeshi Polytex

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Ltd. v. CCE; 1989 (44) ELT 794 was not applicable, nor was the

judgment in CCE v. Gas Authority of India Ltd.; 2008 (232) ELT 7

relied upon the by the respondent. Likewise his submission was

that judgment of the Bombay High Court in the case of Rallis India

Ltd. v. Union of India; 2009 (233) ELT 301 was erroneous

wherein view taken is contrary to the aforesaid submission.

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 the case of Birla Copper (C.A. No. 2337 of 2011) the

Tribunal has decided the matter following the judgment in the

case of Swadeshi Limited (supra). In that case, Ethylene Glycol

was reacted with DMT to produce polyester and ethanol. Methanol

was not excisable while Polyester Fibre was liable to excise duty.

Credit was taken of duty paid on ethylene glycol wholly for the

payment of duty on polyester. The department took a position

that Ethylene Glycol was used in the production of Methanol and

proportionate credit taken on ethylene glycol was to be reversed.

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Page 28 C.A. NO. 8621 of 2010

This Court ruled that the emergence of Methanol was a

technological necessity and no part of ethylene glycol could be

said to have been used in production of Methanol and indeed it

was held that the total quantity of ethylene glycol was used for

the production of polyester. The fact in all these three appeals

appear to be identical to the facts and the law laid down in

Swadeshi Polytex (supra). Therefore, this judgment is squarely

applicable.

26.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. We have already

reproduced Rule 57D above. 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

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Page 29 C.A. NO. 8621 of 2010

understandable. This Rule did not talk about emergence of final

product and a by-product and still said that Rule 57 CC will apply.

The appellant seeks to apply Rule 57CC when Rule 57D does not

talk about application of Rule 57CC to final product and by-

product when the by-product emerged as a technological

necessity. 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. Significantly

this interpretation by the Tribunal in Sterlite (supra) was not

appealed against by the department.

27.We are also unable to agree with the submission of the learned

Secretary General that judgment in GAIL's Case is not applicable.

Significantly, the question as to whether Rule 57 CC will apply

when by-products are cleared without payment of duty came for

discussion in that case. It was held that so long as the lean gas

was obtained as a by-product and not as a final product, Rule 57

CC will not apply. We are, therefore, of the view that the

respondent's case is squarely covered by the judgment in GAIL's

case.

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28.At the stage we should deal with the argument of non

maintainability of the writ petition filed by Hindustan Zinc Limited

before the High Court. No doubt, it had filed writ petition at show

cause stage. However, it was not merely the validity of show

cause notice which was questioned. In the writ petition even the

vires of Rule 57 CC were challenged. That was a reason because

of which the writ petitions were entertained, and rightly so, it is a

different matter that while interpreting the rule, the High Court

chose to read down the said rule and to give an interpretation

which would save it from the vice of unconstitutionality. Moreover,

other statutory appeal filed by the Department is against the

order of CESTAT, which involves same question. Matter is argued

in appeal before us also at length and we are deciding the same

on merits. For all these reasons the argument of alternate remedy

has to be discarded.

29.As a result of aforesaid discussion, we find no merit in these

appeals and dismiss the same with costs.

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…..................................J.

[Anil R. Dave]

…..................................J.

[A.K. Sikri]

New Delhi

May 06, 2014

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