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Judgment
The Department has filed this appeal to assail the order dated Feb 15, 2019 passed by the Commissioner (Appeals), Central Excise & Central
Goods & Service Tax, Jodhpur the Commissioner (Appeals), by which the appeal filed by the respondent â€" M/s Hindustan Zinc Ltd. the respondent,
has been allowed and the order dated December 15, 2017 passed by the Joint Commissioner has been set aside. It needs to be noted that the Joint
Commissioner had confirmed the demand raised under rule of the CENVAT Credit Rules 2004, Credit Rules, Â for clearance of sulphuric acid from
the factory of the respondent during the period from December, 2015 to March, 2016 for Rs.72,93,931/.
The respondent is engaged, inter alia, in the manufacture of lead and zinc and is also availing CENVAT credit of duty paid on inputs and input
services in terms of the provisions of the Credit Rules prevailing during the relevant period from December 2015 to March 2016.
The ore mined from the mine contains zinc and lead, along with several impurities. The ore has to be treated to obtain zinc and lead concentrates. In
the smelting unit, the ore concentrate is fed in the Roaster plant for manufacture of zinc and lead. During the process of calcination of concentrated
ore, sulphur dioxide gas emerges during the manufacture of zinc, which being hazardous, cannot be released in the atmosphere due to pollution control
regulations. Thus, sulphur dioxide is converted into sulphuric acid.
The respondent claims to be clearing the finished goods (zinc and lead) on payment of duty. It further claims that during the relevant period,
sulphuric acid was also cleared on payment of duty but some quantity of sulphuric acid was cleared to fertilizer manufacturers, after claiming
exemption from payment of duty, under Entry No. 86 of the Notification dated March 17, 2012.
The Department entertained a view that sulphuric acid, cleared to the fertilizer units without payment of duty, is an exempted product and hence the
respondent is liable to pay an amount in terms of rule 6(3)(i) of the Credit Rules.
Accordingly, a show cause notice dated May 15, 2017 was issued to the respondent proposing to recover an amount @6% of the value of sulphuric
acid, in terms of rule 6(3)(i) of the Credit Rules.
A detailed reply was filed by the respondent stating, inter alia, that sulphuric acid arises as a by-product during the manufacture of zinc; that no
inputs as well as input services were used in the manufacture of sulphuric acid and that all inputs and input services were consumed in the
manufacture of dutiable final products; rule 6(3) of the Credit rules was not applicable in case of a byproduct/waste emerging during the
manufacturing process; and the issue raised in the show cause notice had been settled in favour of the respondent, in its own case, by the Supreme
Cour in Union of India vs. Hindustan Zinc Ltd. 2014 (303) ELT 321(SC), and also in cases of other assessees.
The relevant portion of the judgement of Supreme Court in Hindustan Zinc is reproduced below:
“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.
**********
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 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.
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.
**********
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. 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.
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 57CC, reference to final product being manufactured with the same common inputs becomes
understandable. This Rule did not talk about emergence of final product and a by-product and still said that Rule 57CC 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.â€
However, the Joint Commissioner, by order dated December 15, 2017, confirmed the demand raised in the show cause notice with interest and
penalty equal to the demand. The decision of the Supreme Court in Hindustan Zinc was held not to be applicable as it pertained to reversal of credit
on inputs and could not be applied to input services.
Feeling aggrieved, the respondent filed an appeal before the Commissioner (Appeals) and by order dated February 15, 2019, the Commissioner
(Appeals) allowed the appeal after placing reliance on the decision of the Supreme Court in Hindustan Zinc as well as other decisions of the
Tribunal. The relevant portion of the order passed by Commissioner (Appeals) is reproduced below:
“8. I have carefully gone through the case records, grounds of appeal as well as submission made during the course of personal
hearing. I find that main issue to be decided in this case are whether by product namely sulphuric acid emerges in appellant factory is
covered under the definition of ‘excisable goods’ as per provisions of Section 2(d) of CEA, 1944, (ii) whether the ‘sulphuric
acid’ qualifies as exempted goods under Rule 2(d) of Cenvat Credit Rules, 2004 and whether Rule 6 of the Cenvat Credit Rules, 2004 is
applicable in the instant case or not?
*******
As per the above definition of exempted goods, goods should be excisable goods. In this regard, the adjudicating authority observed in OIO
that in the budget of 2018, the definition of ‘excisable goods’ in clause (d) of Section 2 of the Central Excise Act, 1944 was amended
by adding an explanation that for the purposes of this clause, “goods†include any article, material or substance which is capable of
being bought and sold for a consideration and such goods shall be deemed to be marketable.
In view of the above the adjudicating authority found that any by-product, though emerges due to technological necessity would be included
in the definition of ‘goods’, hence fall within the ambit of term ‘final product’. Therefore, Rule 6 would become applicable
automatically.
*******
In the light of above, I find that from decision of the Hon’ble Supreme Court and above circular, it is clear that sulphuric acid emerged
in factory of appellant was not a manufactured product and the judgment applies to both periods before and after the insertion of
explanation in Section 2(d) of Central Excise Act, 1944 by Finance Act, 2008.
Since sulphuric acid emerged in factory of appellant was not a manufactured product as discussed above even after 01.03.2008, the same
is not covered under definition of ‘excisable goods’ as provided in Section 2(d) of CEA, 2004 accordingly it was not covered under the
definition of ‘exempted goods’ as provided in Rule 2(d) of Cenvat Credit Rules, 2004.
I find that the adjudicating authority also tried to differentiate the case dealt by the Hon’ble Supreme Court in the case of UOI vs
HZL reported at 2014 (303) ELT 321 (SC), by deciding that the Sulphuric acid is a distinct product and manufacture from the by product i.e
sulphur dioxide as such the same is neither a waste product nor a by product, and the appellant have separate plant and process to
manufactured the Sulphuric acid. In this regard, I observe that the Hon’ble Supreme Court in the above cited case and after examining
the manufacture process of the appellant held that Sulphuric acid is a by-product….â€
I therefore find that there is no dispute left regarding treating the Sulphuric acid as a by-product, hence finding of adjudicating authority on
this account is not correct and same is set aside.â€
(emphasis supplied)
What is important to note is that for the demands raised under rule 6(3)(i) of the Credit Rules in respect of sulphuric acid for the earlier period, the
Suprement Court in Hindustan Zinc held that sulphuric acid is a by- product and there is no necessity to maintain separate records for the zinc
concentrate used in the production of sulphuric acid and that rule 57CC does not talk about emergence of final product and a by-product.
The judgment of the Supreme Court in Hindustan Zinc was subsequently followed by the Tribunal in several cases, including that of the respondent
in Hindustan Zinc Ltd. vs CCE&ST, Udaipur (Excise Appeal Nos. 50357-50362/2017 & 50366/2017 (DB) decided On 29.12.2017. The relevant
portion of the order passed by the Tribunal is reproduced below :
“6. We have perused the impugned order, which tried to distinguish the said decision of the Apex Court to the present facts. The observation of
the Commissioner is that ratio of the Apex Court is applicable to the common inputs and not to the common input service. We find no
legal or factual justification for such conclusion. We note that the Original Authority has fallen in error in attempting to distinguish the ratio, where
no such distinction is available. The ratio is squarely applicable to both the common inputs and common input services as the Apex Court
was examining the applicability of the provisions of Rule 57CC with reference to the payment of a percentage of amount on exempted
goods. The ratio is clear and we do not find any difference in applying the same to the present case.â€
(Emphasis Supplied)
In this view of the matter when the Tribunal rejected the contention of the Department regarding the distinction made between ‘input’ and
‘input service’, it is not possible to accept the submission made by the learned authorized representative of the Department that the judgement
of the Supreme Court in Hindustan Zinc Ltd. would not be applicable to the present case since it relates to ‘input services’ and not
‘inputs’.
There is, therefore, no error in the order dated Feb 15, passed by the Commissioner (Appeals). The appeal filed by the Department deserves to be
dismissed and is dismissed.