CENVAT - Rule 6 - inputs used in manufacture of dutiable & exempted final products - Payment of 8%/separate accounts not applicable for by-products: SC
NEW DELHI : HINDUSTAN Zinc Ltd. - the respondent 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).
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-CE on the execution of bonds by the fertilizer plants to the satisfaction of the excise authorities.
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.
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 Chief Commissioner (present Rule 6) 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 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 the Supreme Court against this judgment.
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 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.
The Supreme Court observed,
"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. 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 Counsel for the respondents, which could not be disputed by the 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 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.
In these circumstances the position taken now by the appellant that sulphuric acid cannot be treated as a by-product cannot be countenanced. 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."
Rule 57CC(Present Rule 6): The Supreme Court observed, "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 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, 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."
Was the Writ maintainable in the High Court ? The Supreme Court observed, "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. So the argument of alternate remedy has to be discarded."
Revenue Appeals Dismissed.
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