Calcutta High Court
Commissioner Of Central Excise vs Indian Iron And Steel Company ... on 30 September, 2022
CEXA NO. 56 OF 2008
REPORTABLE
IN THE HIGH COURT OF JUDICATURE AT CALCUTTA
SPECIAL JURISDICTION (EXCISE APPEAL)
ORIGINAL SIDE
RESERVED ON: 02.09.2022
DELIVERED ON:30.09.2022
CORAM:
THE HON'BLE MR. JUSTICE T.S. SIVAGNANAM
AND
THE HON'BLE MR. JUSTICE PRASENJIT BISWAS
CEXA NO. 56 OF 2008
COMMISSIONER OF CENTRAL EXCISE, BOLPUR
VERSUS
INDIAN IRON AND STEEL COMPANY LIMITED, BURNPUR WORKS,
BURNPUR
Appearance:-
Ms. Manasi Mukherjee, Learned Standing Counsel.
.....For the Appellant.
.....Standing Counsel for Central Excise
Mr. Rahul Tangri, Adv.
.....For the Respondent.
Page 1 of 39
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JUDGMENT
(Judgment of the Court was delivered by T.S.SIVAGNANAM, J.)
1. This appeal by the revenue filed under Section 35G of the Central
Excise Act, 1944 (the Act for brevity) is directed against the order dated
November 21, 2008 passed by the Customs Excise and Service Tax
Appellate Tribunal, East Regional Bench, Kolkata (Tribunal) in Excise
Appeal No. EDM-716 of 2004 in Order No. A-254/Kol/2008. The revenue
has raised the following substantial questions of law for consideration:
(b) Whether M/s. India Iron and Steel Co. Ltd., Burnpur
Works, Burnpur took credit of Central Excise duty paid
on inputs namely Wash Oil and Sulphuric Acid which
were used directly or indirectly, in or in relation to the
manufacture of coal Gas falling under Chapter Sub-
heading No. 2705.00 of the Schedule which is
chargeable to 'nil' rate of duty, but did not debit an
amount of RRs. 1,15,10,820/- being payable in terms
of rule 57C(2) read with Rule 57CC of the Central
Excise Rules, 1944 and/or Rule 57AD of the Central
Excise Rules, 1944 and/or Rule 6(3)(b) of Cenvat Credit
Rules, 2002 at the time of clearance of exempted final
product i.e. coke oven gas/ 'Coal Gas' from the factory
during the period from July 01, 1996 to September 30,
2003.
(c) Whether the manufacture of Coke Oven Gas is said to
be final and complete unless it is made usable and/or
marketable.
(d) Whether the view expressed in the impugned CESTAT
Order bearing No. A-254/Kol/2008 dated February 21,
2008 that the inputs viz. Wash Oil and Sulphuric Acid
have no role to pay in the production of coke oven gas
and these are merely used in the production of the by-
products and that the demand under the provisions of
Rule 57C(2) read with Rule 57CC of the Central Excise
Rules, 1944 and/or Rule 6(3)(b) of the Cenvat Credit
Rules, 2002 correct and proper.
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(e) Whether the Tribunal failed to appreciate the scope of
the Rule 57C(2) read with Rule 57CC of the Central
Excise Rules, 1944 and/or Rule 57AD of the Central
Excise Rules, 1944 and/or Rule 6(3)(b) of Cenvat
Credit Rules, 2002.
2. The respondent assessee is an integrated steel plant engaged in the
manufacture of various excisable goods falling under Chapters 26 to 29, 70
to 73 and 84 of the Schedule of the Central Excise Tariff Act, 1985 (Tariff
Act). Show-cause notice dated 23.05.2001 was issued to the assessee
stating that it has come to the notice of the department that the assessee
are also manufacturing and clearing another excisable product namely, coal
gas falling under Chapter sub-heading 2705.00 which is chargeable to Nil
rate of duty. It was stated that initially coke and crude coke oven gas were
manufactured by destructive distillation process through high temperature
carbonization of Bituminous Coal in a separate unit called coke oven
battery. The crude coke oven gas containing important by-products comes
out as exhaust gas from the coke oven unit. The crude gas as such cannot
be used as fuel as it consists of coal tar and other organic compounds which
would disrupt the supply system. The crude coke oven gas is taken to
another unit called product recovery plant where the crude gas is cleansed
from the other major by-products namely, Naphthalene, Ammonia, Motor
Spirit, Light Oil etc. and waste (coal tar) through use of MODVAT Inputs,
namely, Sulphuric Acid, Wash Oil etc. The pure coal gas thus manufactured
in a marketable stage portion of which is consumed by the assessee within
their factory and a portion is also sold outside without payment of duty as
the product was chargeable to Nil rate of duty under Chapter sub-heading
27.05.
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3. After mentioning about the above manufacturing process, it was stated
in the show-cause notice that coal gas was the only manufactured product
of by-product recovery plant where other important products namely,
Ammonium Sulphate, Naphthalene, Benzene, Toluene, LS Naphtha, Coal
Tar were also manufactured. Further, they were purified through use of
Sulphuric Acid, Wash Oil (MODVAT Inputs) in the recovery plant on which
credit was taken by the assessee. The coal gas has been cleared without
payment of duty as it was chargeable to Nil rate of duty. Hence, it was
alleged that the assessee had taken credit of duty on those inputs, utilized
the inputs in the manufacture of dutiable as well as Nil duty final products
without debiting an amount equal to 20% or 8% of the price of the final
products at the time of their clearance during the period from 01.09.1996 to
31.03.2000 from the factory in terms of Rule 57CC(1) of the said Rule. The
show-cause notice stated that the total amount which ought to have been
paid by the assessee come to Rs. 67,32,348/-. After referring to Rule
57C(1),(5) and (9) it was stated that a reading of the rules would lead to the
conclusion that a manufacturer engaged in the manufacture of both
dutiable and exempted final products can neither avail of the credit of duty
of inputs and pay the prescribed amount at the time of clearance of the
exempted/ chargeable to Nil rate of duty final product or not both the credit
of duty on inputs used in or in relation to the manufacture of exemptible/
chargeable to Nil rate of duty final produce. After referring to Rule 57CC of
the said Rules it was stated that whether or not any of the said MODVAT
Inputs contained in the final product, coal gas, an amount of 8% of the price
of such fuel gas would be chargeable on the quantity cleared outside on sale
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without payment of duty. It was further alleged that the assessee had not
maintained separate inventory and accounts in respect of the said inputs
which were used in or in relation to manufacture of the said Nil rate of duty
final product and have availed the credit of inputs used in the manufacture
of both the aforesaid categories of final product; that the assessee had
neither debited an amount equal to 20% or 8% of the price of the said
exempted final product at the time of its clearance from the factory in terms
of Rule 57CC(1) of the said Rules and thus violated Rule 57C(1) and
consequently are required to pay the amount quantified. Further, it was
alleged that the assessee had knowingly and wilfully with intent to avoid
payment of duty adopted such process and the assessee was called upon to
submit their reply to the show-cause notice.
4. The assessee denied all the allegations as contained in the show-cause
notice, particularly the allegation that they withheld information from the
department. It was stated that to the best of their knowledge and
understanding, they had disclosed all information from time to time as
required and that the show-cause notice has been issued without
appreciating the long standing process prevalent in iron and steel industry
throughout the country. Further, they stated that they are a Public Sector
Undertaking and there cannot be any motive to deprive the Government of
its legitimate duties.
5. The assessee explained their manufacturing process in the following
manner:
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In an integrated steel plant like IISCO, metallurgical coke
is manufactured by carbonization of Coal for use in the Blast
Furnace for iron making. In the course of manufacture of
coke by coal carbonization coke oven gas/ coal gas emerged
as a by-product, raw coal is carbonized by healing in a
closed chamber at high temperature during which the
volatile matter content of coal comes out in the form of coke
oven/ coal gas which is collected through pipe lines. This is
the manufacturing proce4ss of coke oven gas using cola as
the only input. Subsequent steps are carried out for cooling
and cleaning or purifying which does not give rise to
anything different from coke oven gas itself. The following
steps are taken for purifying coke oven gas:-
(i) Coal tar fog from coke oven gas is removed using
unfiltered water at the cooling stages.
(ii) Recovery of Naphthalene from coke oven gas is
done by passing the gas through wash oil spray.
Wash oil absorbs Naphthalene which is subsequently
separated from wash oil and cleared on payment of
duty.
(iii) Benzol products, such as Benzol, Benzene
toluene are separated from coke oven gas by
absorbing them in wash oil. These Benzol products are
cleared on payment of duty.
From the above, it is cleared that the wash oil is used for
the manufacturing of excisable products not for coke oven
gas.
The Raw Coke oven gas can be used for the same
purpose as purified coke oven gas, still the same is purified
for two reasons:
i) Prolonged use of raw coke oven gas may cause
damage to the burners and other downstream
equipments.
ii) The by-products separated out during cooling and
cleaning of coke oven gas has their own market value.
6. By referring to the above process, it was submitted that none of the
inputs were/ are being used for the manufacture of product as mentioned in
the show-cause notice. Further, it was stated that the assessee's object is to
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manufacture iron and steel and coal gas is a by-product/ intermediate
product and, therefore, the question of paying amount equal to 8% of the
price of the goods would not arise. Alternatively, it was submitted that credit
of duty should not be denied in view of Rule 57D as it then stood which
provided that the credit of specified duty allowed in respect of any input
should not be denied or varied on the ground that part of the inputs was
contained in any waste, refuse or by-product arising during the
manufacture of the final produce or any intermediate product coming into
existence during the course of manufacture of the final products whether or
not such waste or intermediate product was exempt from payment of duty or
chargeable to Nil rate of duty.
7. With regard to the allegation of non-submission of monthly return RT-
12, it was stated that filing of RT-12 return in case of exempt goods is not
necessary and a declaration as required under rule 173B of the Rues was
filed every year and in this declaration the details of the products
manufactured by the assessee including the products/ intermediate
products arising or coming into existence during the manufacture of final
products were mentioned. With the above submissions, the assessee
requested for dropping the proceedings by accepting the explanation
submitted by them.
8. The adjudicating authority by order dated 15.07.2004 rejected the
explanation offered and confirmed the proposal in the show-cause notice, by
observing that the perception of the assessee is not correct since Rule
57C(1) and/or Rule 57AD (1) and/or Rule 6(1) stipulates that credit of duty
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shall not be allowed if the inputs are utilized in the manufacture of final
products, which is exempt from the whole of the duty of the excise leviable
thereon or is chargeable to Nil rate of duty. Rule 57C(2) and/or Rule
57AD(2) and/or Rule 6 allows a manufacturer to avail credit subject to
observance of Sub-Rule 1 or Sub-Rule 5 or Sub-Rule 9 of Rule 57CC and/or
Sub-Rule 2(a) or Sub-Rule 2(b) of Rule 57AD of the said Rules. Therefore,
the adjudicating authority concluded that the assessee had violated Rule
57C(1) and/or Rule 57AD(2) and/or Rule 2, 3(a)(b) of Rule 6 of the said
Rules and they are required to pay Rs. 1,15,10,820/- which was calculated
at the rate of 20% and 8% on the value of the said final products cleared
from the factory during the material period. Equal amount of penalty was
imposed under Rule 173Q read with Section 11AC of the Act. Aggrieved by
such order, the assessee filed the appeal before the learned Tribunal,
reiterating the stand taken before the adjudicating authority, the Tribunal
by order dated 21.02.2008 allowed the appeal filed by the assessee. Learned
Tribunal held that the assessee had explained before the authority as well
as before the Tribunal, that the coke oven gas is produced in the coke oven
while converting coal into coke and impugned inputs or not utilized in the
production of such coke oven gas.
9. The Tribunal notes that the assessee clarified that before selling the
coke oven gas partly and partly using the same as fuel, some by-products
such as Benzene, Toluene etc. are derived from the coke oven gas and the
impugned inputs are used merely for deriving such by-products. The
Tribunal took note of the submission of the assessee that the inputs do not
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contribute to production of coke oven gas which comes into being at an
earliest stage in the coke oven itself. After noting the technical process
involved in the production of coke oven gas including subsequent
segregation of by-products from it, the Tribunal was convinced that the
impugned inputs have no role in the production of coke oven gas and these
are merely used in the production of by-products. Hence, the Tribunal held
that the order of the adjudicating authority demanding an amount of 20% or
8% of the value in respect of coke oven gas, which is otherwise chargeable to
Nil rate of duty under the tariff is not justified. Accordingly, the appeal was
allowed. Aggrieved by such order, the revenue is an appeal before us.
10. Ms. Manasi Mukherjee, learned Standing Counsel for the appellant
submitted that the case of the revenue is that the assessee have taken credit
of Central Excise duty on inputs namely, Sulphuric Acid and Wash Oil
which were used in the manufacture of Coal Gas (which is chargeable to Nil
rate of duty) without debiting 20% or 8% of the price of the value of the final
product only at the time of clearance during 1996 to 2006. With regard to
the manufacturing process adopted by the respondent assessee it is
submitted that coke and crude coke oven gas is put to high temperature
carbonization of Bituminous Coal in Coke Oven Battery by which the by-
products that comes into being is crude gas which cannot be commercially
used as it contained Coal Tar and the Coal Tar is cleansed from crude gas in
order to procure pure coal gas as a final product and in the process certain
by-products such as Naphthalene, Ammonia, light oil, motor spirit and the
coal tar is cleansed through use of MODVAT inputs namely wash oil and
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Sulphuric Acid. Hence, it is submitted that in order to obtain pure coal gas
which is the final product here, crude coal gas needs to be cleansed by
using Sulphuric Acid and Wash Oil to remove the coal tar and in the process
few by-products like Naphthalene, Ammonia, light oil etc. comes out.
11. It is further submitted that after that cleansing operation, pure coal
gas emerged out in a marketable stage, used within the factory itself or
outside payment of duty as the product was chargeable to Nil rate of duty
falling under Chapter Sub-heading No. 2705.00 of the Schedule. It was thus
evident that Coal Gas was the only final product of recovery plant where
other important value added products referred were also manufactured and
such coal was purified through use of MODVAT inputs (Wash Oil and
Sulphuric Acid) in the recovery plant on which MODVAT credit was taken
and such coal gas was cleared outside without payment of duty, as it was
chargeable to Nil rate of duty. Hence, it is submitted that the assessee has
taken credit on inputs, utilized input in manufacture of final product which
they have cleared as Nil duty product without debiting an amount equal to
20% or 8% of the price of the said final product during the period 1996 to
2006.
12. The learned Standing Counsel referred to Rule 57C, Rule 57AD of the
Cenvat Credit Rules, 1944 and Rule 6(3)(b) of the Cenvat Credit Rules,
2002. It is submitted that the learned Tribunal has failed to consider the
arguments placed by the revenue with regard to the manufacturing process
and use of the inputs on which credit of Central Excise duty was evaded. It
is further submitted that on a reading of the order passed by the learned
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Tribunal it is not clear as on what basis the learned Tribunal formed an
opinion in support of the respondent assessee as no reason has been
assigned by the learned Tribunal. Further, the learned Tribunal
mechanically accepted the explanation given by the assessee in the reply to
the show-cause notice without taking note of the relevant rules and the
arguments which were placed before it by the revenue. Further, the learned
Tribunal failed to appreciate that unless the by-products are removed
and/or taken out by the use of the inputs such as Wash Oil and Sulphuric
Acid in the manufacturing process, the coke oven gas does not become
usable or even marketable. Further, it is submitted that the respondent
assessee failed to maintain a separate account in respect of inputs which
were used in or in relation to the manufacture of the final and usable
product coal gas on which Nil rate of duty was leviable under law and on the
other hand, availed the credit of inputs used in the manufacture of coal gas.
Further, the learned Tribunal ought to have seen that the Sulphuric Acid
and Wash Oil which were used as inputs in the process of manufacture of
coal gas were used directly or indirectly in or in relation to the manufacture
of coal gas as final product in order to make coal gas or coke oven gas a
marketable and usable product. Further, the learned Tribunal failed to
consider the fact that the assessee has admitted to the use of Wash Oil and
taking input credit on it and kept silent on the use of Sulphuric Acid.
Further, the respondent assessee has failed to give details of any raw
material against which inputs have been used and also admitted to the
allegation made by the revenue that no inventory on accounts of inputs were
maintained by them in violation of the rules by keeping silent on the said
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issue. Thus, it is submitted that the case of the revenue is not whether Rule
57C, Rule 57AD of the 1944 Rules or Rule 6 of the 2002 Rules is applicable
to the by-products but the case is that the respondent assessee have
willfully evaded payment of duty by violating the Rules. Further, the
respondent did not disclose to the department by way of filing return or
maintaining register of separate accounts for receipt, consumption and
inventory of inputs meant for the use in the manufacture of dutiable final
products and quantity of inputs meant for the use in the manufacture of
exempted goods and avail credit only on that quantity of inputs which is
intended for use in the manufacture of dutiable goods. Once again referring
to the relevant rules, it is submitted that the intention of the legislation is
very clear on the aspect that a manufacturer cannot take double benefit by
way of availing credit on inputs from the Government for manufacturing a
final product which is exempted or to be cleared at Nil rate of duty and
precisely for these reasons, Rules have been framed insisting upon
maintaining separate accounts of receipt of input, their consumption in the
factory and quantity of inputs used in the manufacture of an exempted final
product. Therefore, the respondent assessee by not maintaining the register
of inputs or inventory, have suppressed material facts from the department
in order to evade the duty liability. In support of her contention the learned
Counsel referred to the decision in Collector of Central Excise Versus
East End Paper Industries Ltd. 1.
13. Mr. Rahul Tangri, learned Advocate appearing for the respondent
reiterated the contentions which are placed before the adjudicating
1989 (43) ELT 201 (SC)
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authority as well as the Tribunal. Learned Advocate has referred to the flow
chart and also a write up submitted by the assessee on the manufacturing
process and submitted that during the manufacture of metallurgical coke,
crude coke oven gas emerges as an inevitable by-product and such coke
oven gas is hazardous since it contains Ammonia and other products like
coal tar, Naphthalene, Toluene, Benzene etc. and for extraction of such by-
products the crude coke oven gas is taken to the by-product recovery plant
within the factory wherein Sulphuric Acid which is a duty free input reacts
with Ammonia to obtain Ammonium Nitrate as fertilizer and Wash Oil which
is a duty paid input is used to extract other by-products like Naphthalene,
Toluene, Benzene etc. which are cleared on payment of excise duty. It is
submitted that there is a categorical finding of fact recorded by the learned
Tribunal that Wash Oil and Sulphuric Acid have no role in the production of
coke oven gas which is produced as a by-product in the coke oven battery
much prior to the use of such inputs for extraction of other by-products
from crude coke oven gas. Therefore, it is submitted that no substantial
question of law arises for consideration in this appeal. It is reiterated that
the inputs on which credit is sought to be reversed are Sulphuric Acid and
Wash Oil and such inputs are not used in the generation of coke oven gas. It
is further submitted that Sulphuric Acid was a duty free input since it was
exempt from excise duty under notification No. 6 of 2002- CE dated
01.03.2002. The exemption was available to the assessee since Sulphuric
Acid was used for removal of Ammonia from the coke oven gas which led to
the emergence of Ammonium Sulphate, a fertilizer. Therefore, it was
contended since no excise duty was payable on the procurement of
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Sulphuric Acid, there arises no question of reversal of any credit availed.
With regard to Wash Oil it is submitted that it is used for recovery of other
by-products such as Naphthalene, Toluene, Benzene and Benzol from the
coke oven gas which are then separated and cleared on payment of duty.
Therefore, it was submitted that since Wash Oil is utilized at the stage after
the generation of coke oven gas, no part of such Wash Oil can be said to be
used in the generation thereof. Thus, it was contended that since both Wash
Oil and Sulphuric Acid are used at the stage after emergence of coke oven
gas, the question of reversal of credit by treating these inputs as used in the
manufacture of coke oven gas does not avail. It is submitted that though the
above was the consistent stand of the assessee before the adjudicating
authority, no finding has been rendered by the adjudicating authority in its
order dated 15.07.2004 on this aspect. It is further submitted that Rule
57C/57CC of the Central Excise Rule, 1944 and Rule 6 of the Cenvat Credit
Rules, 2001/02 are not attracted in the case of generation of unavoidable
by-products. In this regard, reliance was placed on the decisions in Union
of India Versus Hindustan Zinc Ltd.2, Rallis India Ltd. Verses Union of
India3 and Commissioner of Central Excise and Customs, Vadodara-I
Versus Sterling Gelatin4 which was affirmed by the Hon'ble Supreme
Court in Commissioner Versus Sterling Gelatin.5
14. The learned Advocate appearing for the respondent placed reliance
upon the technical literature as published in the "The Making, Shaping and
(2014) 303 ELT 321 (SC)
(2009) 233 ELT 301 (Bom)
2011 (270) ELT 200 (Guj.)
2015 (320) ELT A343 (SC)
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Treating of Steel", edited by Harold E. McGannon, 9th Edition. This literature
was referred to explain the classification of fuels and what are by-products
and wastes. Further, it is submitted that in the preamble portion of the
show-cause notice dated 23.05.2001, the department themselves have
referred to coke oven gas as exhaust gas. It is submitted that the learned
Standing Counsel for the appellant placed reliance on the decision of the
Tribunal in Binani Zinc Ltd. Versus Commissioner of Central Excise. 6
The said decision of the Tribunal was referred to a Larger Bench which
agreed with the finding of the Two Judge Bench of the learned Tribunal in
the decision reported in 2007 (208) ELT 25 (Tri-LB). However, the decision
of the Larger Bench of the learned Tribunal was reversed by the High Court
of Bombay in the case Rallis India Ltd. (Supra) and the said decision was
affirmed by the Hon'ble Supreme Court in the case of Hindusthan Zinc.
Therefore, it is submitted that the revenue cannot be place reliance on the
decision in Binani Zinc Ltd. On the above ground, the learned Advocate
prayed for dismissal of the appeal.
15. We have elaborately heard Ms. Manasi Mukherjee, learned Senior
Standing Counsel of the appellant and Mr. Rahul Tangri, learned Advocate
appearing for the respondent.
16. As against the impugned order passed by the learned Tribunal, this
appeal was filed before this Court which was dismissed by the Division
Bench by judgment dated 28.08.2008. Challenging the said judgment, the
revenue preferred appeal before the Hon'ble Supreme Court which was
2005 (187) ELT 390 (Tri-Bang)
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allowed and the judgment dated 28.08.2008 was set aside and the matter
was remitted back to this Court to decide the matter afresh in accordance
with law as expeditiously as possible (Commissioner Versus Steel
Authority of India Ltd.7). In terms of the directions issued by the Hon'ble
Supreme Court, the appeal has been heard by us and is being disposed of
by this judgment and order.
17. The question involved in the instance case is whether the inputs
namely Wash Oil and Sulphuric Acid on which credit of duty was availed
had a role in the production of coke oven gas/ coal gas directly or indirectly
or in or in relation thereto or whether these were used in the production of
by-products only as claimed by the assessee. Before we examine the factual
and legal issues which have been elaborately canvassed before us, it would
be useful to refer to the manufacturing process adopted by the respondent
assessee which is stated as hereunder:
GENENRATION AND CLEANING OF COKE OVEN GAS
AT COKE OVENS IN ISP, SAIL
In integrated steel plant like ISP, Coke Ovens play a vital role
for providing metallurgical coke in blast furnace and coke oven
gas which is used as a fuel in the entire steel plant operation.
Raw coke oven gas thus generated during coal carbonization
contains lot of impurities like Coal Tar, Ammonia, Naphthalene
etc. which are potential threat towards choking as well as
corrosion to the entire gas distribution network. For this,
purification of raw coke oven gas is a must and technological
necessity for its use as a fuel. However in the process of
cleaning, several by products like Coal Tar, Ammonium Sulphate,
Naphthalene, Crude Benzol are generated.
2015 (320) ELT A39 (SC)
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Coke oven gas generated during high temperature
carbonization of coal charge leaves free space of ovens at 800-
850 Degree Celsius and passes through stand pipes to the
hydraulic mains where it is sharply cooled to 80-82 Degree
Celsius by spraying flushing liquor. Intensive cooling results in
partial condensation of tar water vapours. About 70-75% of tar
separates out in hydraulic mains. C.O. gas is then cooled to 30-
35 Degree Celsius in Primary Gas Coolers by indirect cooling
with water where about 20% of tar separates before it is sucked
by Exhauster and transported through different by product
recovery units. C.O. gas then enters Detarrers (electrostatic
precipitators) where final traces of tar is removed by employing
strong electric field of 33KV. The liquid phase thus collected
comprises of tar and liquor, and is pumped to a gravity decanter
for settling and separation. Tar and liquor are collected in
respective storage tanks.
Ammonia present in the coke oven gas is removed and
recovered as Ammonium sulphate by semidirect process through
intimate contact with dilute sulphuric acid in an equipment called
Saturator according to the following reaction:
NH2 + H2SO4 - NH4HSO4
NH4HSO4 + NH3 - (NH4)2SO4
The C.O. gas after Detarrer flows through gas preheater where
it is heated by means of indirect steam to 65-70 Degree Celsius
before entering the saturator. In saturator, gas is bubbled
through an aqueous acidic solution. Concentrated Sulphuric Acid
of 98% strength is continuously supplied into the saturator for
maintaining bath acidity to 4-6%. As gas bubbles through
saturator liquor, reaction between Ammonia and Sulphuric Acid
proceeds and Ammonium Sulphate is continuously formed and
settled down at the bottom of saturator as crystals. The slurry
containing 30-40% crystals is taken out by air ejector and the
crystals are separated in settling pan and then by centrifugation.
Wet salt from centrifuge containing moisture upto 45 is dried in
rotary drum drier to 0.2-0.3% moisture and bagged in HDPE
bags for selling.
After the recovery of tar and then ammonia by saturator
process, Coke Oven Gas enters at a temperature of 50-55 degree
Celsius at the bottom of Secondary Cooler (Stage I) where it is
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cooled by means of direct contact with water in counter current
direction to a temp. (approx 35-38 degree Celsius) near that of
gas after Primary Cooler. Gas, thus cooled, emerges from the top
of secondary cooler (stage II) consists of two sections.
Wash oil, a petroleum fraction is sprayed in the lower section
by means of spray nozzles. The gas during its passage comes in
direct contact with the oil and Naphthalene from C.O. Gas is
absorbed into oil. The circulation of Wash Oil in the lower part of
Sec. Cooker (stage II) is continuous and a part of this
naphthalene rich oil is sent to naphthalene stripping plant where
naphthalene is recovered as saleable product. The gas from the
lower part ascends to the upper part of the cooler where it is
cooled further by direct contact with water.
C.O. gas from Sec. Cooler (stage II) passes through Scrubber for
the recovery of crude benzol present in gas wash oil is sprayed
continuously from the top of the Scrubber at the rate of 1.8 to 2.5
lts./Nm3 of C.O gas. Benzol hydrocarbons are absorbed by
wash oil. Benzol rich oil known as "Benzolised Oil" is then
stripped in Benzol. Toluene Plant to recover crude benzol and the
stripped oil is again fed back into the scrubbing system. The
clean coke oven gas after the scrubber is used as fuel in coke
oven under firing and steel making.
Sd/- Sd/-
11.07.08
11.07.08
A.G.M (Superintendent)
Steel Authority of India Limited Central Excise
SCO Steel Plant Burnpur Hirapur Range
Burnpur-713328
18. A flow diagram of the coke ovens has also been placed before us and in
our opinion, the said flow diagram would make the factual position clearer
and therefore, we extract the same.
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FLOW DIAGRAM OF COKE OVENS
Coal
Box Wagon Tippler
Kompilador
Piles
Primary Crusher
Blending Bunkers
Secondary Crusher
Service Bunker
Cr.C.O. Gas Cr.C.O. Gas
CO Battery ................................................ Return Liquor Liquor to
from Battery Battery
Coke
W....(not legible) Tar &
Close Circuit
Screen Liquor Primary Cooler
Water
Coke Cutter Tar Catch Tank
Tank Exhauster
Make up
Liquor
Screen...........>B.Fec Coke Detarrer Condensate Tank
To Tar Catch
Decanter
Domestic Bunkers Preheater
Tar Tank Liquor Storage Tank
Nut Slurry Tar for Despatch
Pearl Saturator Salt Centrifuge S.O.A. for Despatch
Liquor
Breeze Acid Catcher
Close Circuit Water Sec. Cooler. I
s
Wash Oil
Sec. Cooler-II
Rich Oil to N.S.P for Removal of
Naphth
Benzoi Scrubber Wash Oil from BTP
Clean C.O. Gas Rich Oil to BTP for removal of Cr. B'zol
The undisputed
A.G.M. facts are t
(C.O. Oprn) (Superintendent)
Steel Authority of India Limited Central Excise
IISCO Steel Plant, Burnpur Hirapur Range
Burnpur-713325
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19. The undisputed facts are that the assessee is an integrated steel plant
and in their factory they manufacture and clear excisable goods falling
under Chapters 26 to 29, 72, 73 and 84 of the Schedule to the Central
Excise Tariff Act, 1945 (the Tariff Act). In the show-cause notice it has been
stated that initially coke and crude coke oven gas were manufactured by
destructive distillation process and through high temperature carbonization
of Bituminous Coal in a separate unit called coke oven battery. The crude
coke oven gas containing by-products comes out as exhaust gases from the
coke oven unit. The crude gas cannot be used as fuel as it contains coal tar
and other organic compounds as by-products which on natural
condensation would jam the pipeline thereby disrupting the supply system.
The crude coke oven gas is therefore taken to another unit called by-product
recovery plant where this crude gas is cleansed from the major by-products
namely, Naphthalene, Ammonia, Motor Spirit, light oil etc. and waste (Coal
tar) by using MODVAT inputs namely, Sulphuric Acid and Wash Oil. The
pure coal gas thus manufactured in a marketable stage is partly consumed
in the assessee's factory and the remaining sold outside without payment of
duty as the product was chargeable to Nil rate of duty under SH 27.05. The
revenue would state that from the aforementioned manufacturing process it
is evident that coal gas was the only manufactured product of by-product
recovery plant where other important products namely, Ammonium
Sulphate, Naphthalene, Benzene, Toluene, LS Naphtha, coal tar were also
manufactured. Further it is evident that coal gas was purified through use
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of MODVAT inputs namely, Sulphuric acid and Wash Oil in the recovery
plant on which the credit was taken. It was further evident that coal gas was
cleared by the assessee without payment of duty as it was chargeable to Nil
rate of duty. Therefore, it was stated that the assessee has taken credit of
duty on those inputs, utilized those inputs in the manufacture of dutiable as
well as Nil rate of duty final products without debiting an amount equal to
20% or 8% of the price of the said final products at the time of their
clearance during the period from 1st September, 1996 to 31st March, 2000 in
terms of Rule 57CC(1) of the Rules.
20. Rule 57C(1) of the Rules states that credit of duty shall not be allowed
If the inputs are utilized in the manufacture of a final product which is
exempt from the whole of the duty of excise leviable thereon or is chargeable
to Nil rate of duty. Rule 57C(2) of the Rules permits the manufacturer
engaged in the manufacture of dutiable as well as exempted final products
to avail credit of duty paid on inputs in the manufacture of dutiable as well
as exempted final products subject to absorbance of the procedure under
Rule 57CC(1) or (5) or (9) of the said Rules. In terms of Rule 57CC (1), the
manufacturer can avail credit of duty paid on inputs used in the
manufacture of dutiable as well as exempt final products if he pays an
amount equal to 8% or 20% (for 1996-97) of the price of the exempted final
product at the time of clearance from the factory. Rule 57CC(9) provides that
the manufacturer shall maintain separate inventory and accounts of the
receipt and use of inputs for the purpose of manufacture of such exempted
final products and shall not take credit on the specified duty on such
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inputs. The further allegation against the assessee is that they have not
maintained separate inventory and accounts as required under Rule
57CC(9) of the Act of the Rules. The rigour of Rule 57CC(1) of the Rules is
dispensable if the inputs used for the manufacture of exempted final
products or those chargeable to Nil rate of duty are inputs used by the
assessee namely, Sulphuric Acid and Wash Oil cannot be considered as fuel
and these items are used directly or indirectly in or in relation to the
manufacture of coke oven gas. As the extended period of limitation was
invoked for issuance of the show cause notice, it has been alleged that the
assessee have done so knowingly and willfully with intention to evade
payment of duty.
21. The assessee while contesting the allegations in the show-cause notice
at the very outset pointed out that all information to the best of their belief
and understanding have been disclosed to the department from the point of
view as required. Further it was stated that the long standing practice
prevalent in Iron and Steel Industry throughout the country has not been
taken note of the by the respondent. More importantly, the assessee
contended that they being the public sector undertakings there cannot be
any motive to deprive the Government of its legitimate dues. Further the
assessee had stated that no proper enquiry was conducted by the
department for issuing the show cause notice and the allegations are
misconceived in law as well as on facts. Further it was stated that the
department failed to take into consideration that no credit of duty has been
availed on the inputs under Rule 57AA or Rule 2 of the 2001 Rules for the
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final product namely Coal Gas. Manufacturing process adopted by the
assessee has been noted above as well as the flowchart showing the process.
The revenue has not denied the manufacturing process nor disputed the
contents of the flow chart that sets out various stages in the process of
manufacture. From the materials placed before this Court, it is seen that
metallurgical coke is manufactured by the carbonization of coal for use in
the Blast Furnace for making iron. In the course of manufacture of coke by
coal carbonization by-product such as coke oven gas/coal gas emerges. It is
being further explained that raw coal is carbonized by heating in closed
chamber at high temperature during which the volatile matter content of
coal comes out in the form coke oven/coal gas which is collected through
pipelines. It has been specifically stated in the manufacturing process that
coal is the only input for manufacturing process of coke oven gas. Further
steps which are carried out such as process of cooling, cleaning or purifying
does not give rise to anything different from coke oven gas. In the preceding
paragraph, we have noted the steps taken for purifying coke oven gas. The
respondent assessee has been able to explained through note on the
manufacture process and the flow chart that wash oil use for manufacturing
of excisable product not for coke oven gas. This factual aspect has not been
shown to be wrong by the department nor there is any finding to the said
effect in the adjudication order or that MODVAT inputs are used for
manufacture of coke oven gas. The question would be whether the
allegations made in the show cause notice against the assessee was
justified. From the note on the manufacturing process, it is evident that
during the process of manufacture of metallurgical crude coke oven gas
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emerges as by product and it is inevitable by-product. The assessee's case
has not been disputed by the revenue that coke oven gas contains lot and
hazardous substances. The crude coke oven gas which emerges as an
inevitable by-product has taken to another plant called as the by-product
recovery plant which is a separate and independent process. This fact has
not been disputed by the department rather admitted. It is in the by-product
recovery plant sulphuric acid which is duty free input is used to obtain
Ammonium Nitrate by a process of reaction with Ammonia and the end
product is used as fertilizer. The wash oil which is the duty paid input is
used to extract other by-products like naphthalene, toluene, benzene which
are cleared on payment of duty. After recovery of these products in the by-
product recovery plant clear coke oven gas emerges which is partly used as
fuel in the assessee's factory and some sold outside without payment of duty
since it attracts Nil rate of duty. These facts are not controverted by the
department. Thus, going by the manufacturing process what emerges is that
the sulphuric acid (duty from input) and wash oil (duty paid input) are not
used for producing coke oven gas which in fact, is by-product which
automatically emerges in the manufacturing process of metallurgical coke.
22. In the book The Making, Shaping and Treating of Steel by Harold E.
McGannon, 9th Edition, classification of fuels has been explained. It is stated
that there are four general classes of fuel namely fossil, by-product or waste,
chemicals and nuclear. The first three classes of fuel are energy released by
combustion of carbon and hydrogen with an oxidant usually oxygen;
process involves electronics exchange to form products of lower energy such
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as a consequence of energy released in an exothermic reaction. By-product
are derived from a main product and order of secondary nature and example
of these fuel are coke oven gas, coke, blast furnace gas, wood waste, and so
on. It has been further stated that fossil and by-product fuel accordingly
used in the steel industry are classified further into three general divisions
namely solid, liquid and gaseous fuel. Fuel in each general division can be
classified further as natural manufacture or by-product. Fuel found in
nature sometimes are called primary fuel; those manufactured for a specific
purpose are market altogether with those that are inevitable by-product of
some regular manufacturing process, are called secondary fuel. In the
classification of fuel under the general division can gaseous the primary fuel
being natural gas and one of the product manufactured is coal gas, which is
secondary fuel and the by-product which arises during coke manufacture is
coke oven gas. In the article there is an elaborate discussion of by-product
gaseous fuel. It is stated two major products gaseous fuel are blast furnace
and coke oven gas. It is stated that the steel industry which uses 90% of the
total coke oven gas generated in United States, generally classified coke oven
gas, as by-product of coke manufactured. This is untimely due to the former
waste of coke oven gas and other coal products for so many years in the
beehive coke process. It is further stated that coke oven gas is produced
during the carbonisation or destructive distillation of bituminous coal in the
absence of air. The combustion of coke oven gas varies in accordance with
grade and density of coal and operating practices. Coke oven gas contains
hydrogen sulphide. The above literature clearly demonstrates that coke oven
gas is classified as a by-product. If such is the technical position, the
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department are not justified in holding that such is a by-product which is
inevitable by-product as being manufactured by use of MODVAT inputs.
23. In the given fact situation, we are to consider as to whether the
allegations made by the department is justified. To answer these questions,
we seek the guidance of certain decisions. In Hindustan Zinc Limited, the
question which arose for consideration was with regard to the entitlement of
the assessee therein 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 regard to inputs used in dutiable goods as well as exempted goods and
the liability arising on failure of the assessee to maintain such separate
account. In one of the appeals in the batch, the product was sulphuric acid
as in the case on hand. The question which fell for consideration was
whether the assessee therein were entitled to MODVAT/CENVAT on inputs
used in the manufacture of the exempted or MODVAT rate of duty final
products.
24. As contended before us by Ms. Mukherjee, the revenue has argued
before the Hon'ble Supreme Court that the assessee therein are liable to pay
8% excise duty as an amount under Rule 57 CC of the 1944 rules or Rule
57 AD of the 2000 rules or Rule 6 of the 2004 rules on the value of the by-
product namely sulphuric acid, which was cleared to fertilizer plant under
exemption in terms of the bonds executed by the fertilizer plant. After noting
the manufacturing process as explained before the Hon'ble Supreme Court,
it was held that sulphuric acid is indeed a by-product and it was so treated
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in the balance sheet of the respondent therein as well as various other
documents and the assessee were established for the purpose of producing
zinc and copper and not sulphuric acid. The revenue could not dispute the
fact that emergence of sulphuric acid in the calcination process of
concentrated ore is not 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. Further it was pointed out that
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. Further the respondent therein had
explained that ore concentrates zinc or copper are completely utilized for the
production of zinc and copper and no part of the metal zinc and copper
forms part of the sulphuric acid which is cleared out. Further it was
explained that the extraction of zinc from the ore concentrate will inevitably
result in the emergence of sulphuric acid as technological necessity and it is
not that the respondent therein can use lesser quantity of zinc concentrate
only to produce the metal and not produce sulphuric acid; 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 the
assessee therein have no control. Thus, the Hon'ble Supreme Court
accepted the contention of the respondent therein that ore concentrate is
completely consumed in the production of zinc and no part of the metal is
formed part of the sulphuric acid. The next aspect examined by the Hon'ble
Supreme Court is with regard to the position contained in Rule 57CC of the
rules and noting of the facts stated therein and held as follows:
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Let us now examine the position contained in Rule 57CC on
the touchstone of the aforesaid position. No doubt, Rule 57CC
requires and assessee to maintain separate records for
inputs which are used in the manufacture of two or more
final 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,
sulphurs vulcanizing agents which are used in production of
tures are indeed common to both dutiable and exempt tyres.
Such assessees 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 nto
the production of sulphuric acid, applicability of Rule 57CC
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 57CC on exempted sulphuric acid
is not attracted.
25. Further the Hon'ble Supreme Court had pointed out as to in what
manner rules have to be read and that the Rule 57CC cannot be read in
isolation
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 Rules 57A, 57B
and 57D along with 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-products', 'waste
product' etc. We are of the opinion that these terms have been
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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 recognized by the legislating
itself. Significantly this interpretation by the Tribunal in Sterility
(supra) was not appealed against by the department.
26. The above decision in our considered opinion would apply with full
force to the case on hand for which all that we need to do is to substitute
the product sulphuric acid with crude coke oven gas and the resultant
position would be a by-product which is inevitable by-product which
emerges as technological necessity has been shown to emerge without
utilizing either sulphuric acid or wash oil which are MODVAT inputs in such
process. The flow chart clearly demonstrates as to the stage in which the
crude coke oven gas emerges and the only product which goes into the
manufacture at that stage is coal. The decision in Reliance India Private
Limited was affirmed by the Hon'ble Supreme Court in Hindustan Zinc
Limited. It would be beneficial to refer to the one paragraph of the said
decision which would match the factual position in the case on hand which
is quoted herein below:
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 57CC, was not applicable at the time
of clearance of the waste liquor arising in the manufacture of
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dutiable gelatin, then the said rule cannot be applied merely
because mother liquor was further processed to manufacture
exempted final product, namely, phosphoryl 'A' and '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 57CC would not
apply at the time of clearance of the exempt phosphoryl 'A'
and 'B' manufactured out of waste mother liquor.
27. In the preceding paragraph, we have noted the manufacturing process
adopted by the assessee and the emergence of crude coke oven gas is
technological necessity and in evitable by-product and it is not exempted
final product and it is neither the case of the department that it is the final
product. The decision in Hi-Tech Carbon is closest to the facts of the case
on hand. The assessee therein manufactured carbon black that are goods
classified under Chapter 28 of the First Schedule of the Tariff Act, 1985
using Carbon Black Feed Stock (CBFS) the raw material/input. In that
process RFO/LSHS/LDO/FO was used as fuel. The assessee therein
subjected CBFS to process known as thermal cracking. It resulted in
production of carbon black in particle form. However in this process "off
gases" also known as "lean gases" emerged by way of technological necessity
and those gases have high content of carbon mono-oxide and are hazardous
and cannot be released freely into atmosphere. Therefore, the assessee
therein burnt carbon mono-oxide content in the 'off gases'/lean gases' before
releasing the same into atmosphere. The burnt of carbon mono-oxide
generated heat that could either to be allowed to escape or put to use which
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the assessee did by generating steam from demineralised raw water treated
with caustic soda and hydrochloric acid by employing boiler and the steam
generated were then used, part to pre-heat CBFS the remaining quantity of
steam we sold. The tribunal in the said case held for reversal of input credit
utilization to Rule 57C or Rule 57CC of the rules it was pre-requisite that
the input on which the input credit has arisen should have been used to
manufacture of exempted product along with dutiable product. The Tribunal
further held that by insertion of Rule 57CC, there was no intention to
deprive the assessee of the benefit available under rules 57D(1) of the rules
to a by-product, waste, or refuse. Thus, it was held that no part of input
credit availed was to be disallowed. The order passed by the tribunal was
challenged by the revenue before the High Court at Allahabad and the
questions were answered against the revenue in the following terms:-
In the first instance 'off gases'/lean gases appear to be
a 'waste' or 'refuse'. However, in the present case, the
Tribunal has found them to be a 'by-product'. In any
case being hazardous to the environment (on account of
high content of Carbon Monoxide), they could not be
freely released into the atmosphere. The assessee burnt
the Carbon Monoxide present in 'off gases' / 'lean
gases' before releasing the same in the atmosphere.
The language of Rules 57C and 57CC of the Rules is
clear. Those Rules would operate to disallow input credit
to a manufacturer in specified situations involving
manufacture of goods in which duty paid input had
been used to manufacture goods that were either
exempt from duty payment or liable to clearance at nil
rate of duty.
For Rule 57C to apply it must be shown that the goods
so cleared were 'final product' (other than a final
product as had been excluded under that Rule) that
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were either exempt from payment of duty or chargeable
to nil rate of duty. On the other hand, Rule 57CC applies
to a situation where using a duty paid input, 'any
product' (other than such products as have been
excluded under that Rule) is cleared by an assessee
and such a 'product' is either exempt from the whole of
duty of excise or is chargeable to nil rate of duty.
Thus, two things must be established 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' 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 duty or be chargeable 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 by subjecting CBFS to thermal process.
The 'off gases' / 'lean gases' itself arose because of
technological necessity upon CBFS being subjected to
thermal cracking process to product Carbon Black.
However, for that process to be completed there was no
requirement to burn 'off gases' / 'lean gases'. The
process to manufacture Carbon Black was complete
before the 'off gases' / 'lean gases' were burnt. The
second process involving burning of 'off gases' / 'lean
gases' was therefore, totally separate and disconnected
with the first, as emerges from the order of the Tribunal.
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Then in the second process, 'off gases' / 'lean gases'
were burnt to generate heat and it was heat that was
used to manufacture 'steam', 'off gases' / 'lean gases'
did not contain 'steam' and they could not product
steam on their own. They had to be burnt to produce the
heat that in turn was used to generate 'steam' from
water.
Therefore, it would be too far fetched and fanciful to
reason that 'steam' was generated by using CBFS as in
input when (i) no part of CBFS was burnt to generate
'steam' (ii) the entire quantity of CBFS was subjected to
thermal cracking to product Carbon Black only, (iii) the
process of thermal cracking of CBFS did not result in
generation of steam but only in the manufacture of
Carbon Black as the final product and 'off gases' / 'lean
gases' as a 'by-product' (iv) 'off gases' / 'lean gases'
were burnt in a separate process. It generated heat (v)
the heat so generated was in turn utilized 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 utilization of a duty paid input), one
of which is either exempt from duty payment or is
cleared at nil rate of duty.
28. The decision in Sterling Gelatin also gives assistance to the case of
the assessee, the facts are more or less identical except that the assessee
therein was engaged in the manufacture of Gelatin and Di-Calcium
Phosphate the following paragraphs of the decision would support the case
of the assessee before us:-
Thus, on a plain reading sub-rule (1) of Rule 6, it is
apparent that CENVAT credit is admissible in respect of
the inputs used in the manufacture of dutiable goods and
is inadmissible on such quantity of inputs which is used
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in the manufacture of exempted goods. Sub-Rule (2)
imposes an obligation on the manufacturer who
manufactures final products and exempted goods from
the common input to maintain separate accounts for
receipt, consumption and inventory of inputs. Examining
the applicability of the aforesaid rules to the facts of the
present case, as noted hereinabove, it not as it more
quantity of Hydrochloric Acid is used than that required
for manufacturing Gelatin or that by using a smaller
amount of Hydrochloric Acid, the product of Mother Liquor
could be averted. In the manufacturing process adopted
by the assessee, it is not possible to manufacture Gelatin
without Mother Liquor coming into existence. Thus, when
the entire quantity of input viz. Hydrochloric Acid is used
in the manufacture of the final product being Gelatin
which is dutiable product, the mere fact that a by-product
emerges during the process would not bring the by-
product within the ambit of Rule 6 of the Rules so far as
to call for maintaining separate accounts in respect of the
same. When the entire quantity of input is used in the
manufacture of Gelatin, the question of maintaining
separate accounts or of paying a percentage of the total
price of the exempted goods would not arise. In the
peculiar facts of the present case, sub-rule (1) of Rule 6 ,
itself would not come into play in as much the
manufacturer does not deliberately use any quantity of
the inputs, viz. Hydrochloric Acid for manufacturing
Mother Liquor, the entire Hydrochloric Acid is used in the
manufacture of Gelatin. Thus, when no input is
specifically used for the purpose of manufacturing Di-
Calcium Phosphate, there would be no question of
maintaining separate accounts for receipt, consumption
and inventory of input.
At this stage, it may be germane to refer to the decision of
the Supreme Court in the case of Commissioner of Central
Excise, Mumbai Versus National Organic Chemical
Industries Limited, (2008) 16 SCC 490 = 2008 (232) ELT
193 (S.C) wherein the question before the Supreme Court
was as to whether emergence of methane and ethane
during the course of manufacture of ethylene and
propylene would be a ground for denial of benefit of
exemption in respect of ethylene and propylene which
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was exempt from excise duty. It was contended on behalf
of the respondent assessee that there was no way by
which the respondent could have manufactured ethylene
and propylene for producing ethane and methane. The
Court held that it was not as if by using a smaller
quantity of raw materials or other goods involved in the
process the respondent could have averted the emergence
of ethane and methane. In other words, in the technology
utilized for the manufacture of ethylene and propylene,
the emergence of ethane and methane was inevitable.
Hence, while it was no doubt correct to say that ethylene
and propylene had been used in or in relation to
manufacture of ethylene and propylene. The emergence
of ethane and methane therefore, by itself was not a
ground to deny the benefit of the exemption notification.
On behalf of the appellant it has been submitted that
common input Hydrochloric Acid was used in the
manufacture of both Gelatin as well as Di-Calcium
Phosphate hence, in the light of the provisions of Rule 6(2)
of the Cenvat Credit Rules, 2002, the respondent was
required to maintain separate accounts for receipt,
consumption and inventory of input meant for use in the
manufacture of dutiable final products and the quantity
of input meant for use in the manufacture of exempted
products and take Cenvat credit only on that quantity of
input which was intended for use in the manufacture of
dutiable goods. In the present case, the assessee has
taken Cenvat credit only on that quantity of input, which
was intended for use in the manufacture of dutiable
goods, therefore also the question of invoking sub-rule (2)
of Rule 6 of the Rules would not arise.
29. The above decision was affirmed by the Hon'ble Supreme Court as the
appeal against the said decision was dismissed as reported in 2015 320
ELT A 343 (SC).
30. The revenue placed reliance on the decision in the case of Paper
Industries Limited. In the said case, the respondent manufactured
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different varieties of printing papers including wrapping papers falling under
Item No. 17 (1) of the Erstwhile Central Excise Tariff. The Department's
contention was the respondent therein had violated the provisions of Rule 9
(1) Rule 173 F and Rule 173 G of the 1944 rules in as much as they have
removed 4000 wrapping papers without payment of central excise duty. The
show cause notice was issued. It was contended that the wrapping of carbon
product by wrapping paper is process incidental and auxiliary to the
completion of manufactured product under 2(F) of the Act and wrapping is
used as component part of having excisable goods attracting the benefit of
notification dated 09.07.1993. The department did not agree with the stand
taken by the assessee. The appeal filed before the Collector was also
rejected. On further appeal to the tribunal, the order of the Collector was set
aside and challenging the same appeal was preferred to the Hon'ble
Supreme Court. While dismissing, the Hon'ble Supreme Court held that to
be able to be marketed or to be marketable, (considering the facts of the said
case) that wrapping in paper was an essential requirement and anything
required to make goods marketable must form part of the manufacture and
any raw materials or any materials used for the same would be component
part for the end product. The said decision is wholly distinguishable on facts
and can never assist the case of the revenue. More so, when it remains an
undisputed that position MODVAT inputs are used much after emergence of
coke oven gas and therefore the question of reversal of credit by treating
them as inputs used in the manufacture of coke oven gas does not arise.
Thus, the learned tribunal was right in granting relief to the assessee.
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31. The appellant department while issuing the show-cause notice dated
2.05.2001 for the period from 01.07.1996 to 31.03.1997 and 01.04.1997 to
30.03.2003 had invoked the extended period of limitation. In the show-
cause notice further setting out the allegations against the respondent it is
alleged that the assessees have committed such violations knowingly and
willfully with intent to evade payment of duty. The respondent in the reply to
the how-cause notice had specifically denied the allegations that he withheld
information from the Central Excise Department. They had stated that
according to the best of their knowledge and understanding they have
disclosed all information from time to time as required and the show-cause
notice has been issued without appreciation a long standing practice
prevalent in the iron and steel industries throughout the country. Further
the respondent stated that they are a Public Sector Undertaking and there
cannot be any motive to deprive the Government of its legitimate dues. The
Commissioner of Central Excise, Bolpur in the order of adjudication dated
15.07.2004 though as referred to the specific submission of the respondent
in the reply to the show-cause notice has not recorded any finding
supported by material that the respondent assessee had willfully suppressed
details from the department with an intent to evade payment of Central
Excise Duty. Merely, by stating that the assessee had suppressed vital facts
and had been availing credit on duty paid inputs even in respect of goods
chargeable to Nil rate of duty is not sufficient to justify invoking the
extended period of limitation by resorting to the power under Section 11AC
and Section 11AB of the Act. The respondent assessee's specific case is that
they are a Public Sector Undertaking and at no point of time they had any
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intention to deprive the Government of its legitimate dues. Therefore, we can
safely conclude that the ingredients of the relevant statutory provisions have
not been made to invoke this extended period of limitation. Section 11A of
the Central Excise Act states that when any duty of excise has not been
levied or paid or has been short-levied or short-paid or erroneously
refunded, by reason of fraud, collusion or any willful mis-statement or
suppression of facts or contravention of any of the provisions of the Act or
the Rules made thereunder with intent to evade payment of duty, such
person is levied to pay duty in full or any part accepted by him and interest
payable under Section 11AB and penalty equal to 15% of the duties
specified in the inputs or the duty was accepted by such person within 30
days of the receipt of the inputs. Section 11AC of the Act deals with penalty
for short-levy or non-levy of duty in certain cases. The provision states that
where any duty of excise has not been levied or paid or has been short-
levied or short-paid or erroneously refunded by reason of fraud, collusion or
any willful mis-statement or suppression of facts or contravention of any of
the provisions of the Act or the Rules made thereunder with intent to evade
payment of duty, the person who is liable to pay duty as determined under
Section 11A (2) was also liable to pay penalty equal to the duty do
determined. Nowhere in the order of adjudication, the authority has
recorded a finding that the respondent assessee is guilty of willful mis-
statement, suppression of facts with an intent to evade payment of Central
Excise Duty. Therefore, the invocation of the extended period of limitation to
initiate action is vitiated.
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32. In the result, the appeal filed by the revenue is dismissed and
substantial questions of law are answered against the revenue. No costs.
(T.S. SIVAGNANAM, J.)
I Agree.
(PRASENJIT BISWAS, J.)
(P.A.-PRAMITA/SACHIN)
