TIOL-DDT 2348
07.05.2014
Wednesday
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CENVAT - Rule 6 - inputs used in manufacture of dutiable & exempted final products - Payment of 8%/separate accounts not applicable for by-products: SC
07.05.2014
Wednesday
AS
per Rule 6 of the CENVAT Credit Rules, a manufacturer who avails of
CENVAT credit in respect of any inputs and manufactures such final products which
are chargeable to duty as well as exempted goods, shall maintain
separate accounts for receipt, consumption and inventory of inputs
meant for use in the manufacture of dutiable final products
and the quantity of inputs meant for use in the manufacture of
exempted goods. If he is not able to maintain separate accounts, he
should pay an amount equal to six percent of the value of the exempted
goods.
What are final products?
Do they include by-products? For example in the manufacture of zinc,
sulphuric acid is an unavoidable by product. The zinc factory's purpose
is to manufacture zinc - not sulphuric acid. Now if this zinc is
exempted, should the assessee who has taken credit on inputs pay six
percent while clearing exempted sulphuric acid?
This was exactly the question before the Supreme Court in a judgement delivered yesterday.
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."
On the requirement of payment of 6% of the value, the Supreme Court observed,
This landmark judgement delivered yesterday is brought to you today. Please see Breaking News."No doubt, Rule 57CC (present Rule 6) 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."
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CENVAT - Rule 6 - inputs used in manufacture of dutiable & exempted final products - Payment of 8%/separate accounts not applicable for by-products: SC
By TIOL News Service
NEW DELHI , MAY 07, 2014: 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.