2010 (9) TMI 857 - HC - Central Excise

Rule 6(1) and 6(2) not triggered when inputs fully used for dutiable goods, exempt by-products incidental

HC held that Rule 6(1) and 6(2) of the Cenvat Credit Rules were inapplicable where Hydrochloric Acid was entirely used in manufacturing dutiable Gelatin ... Cenvat credit - Obligation of manufacturer of dutiable and exempted goods - Maintenance of separate accounts for common inputs - By-product / waste arising inevitably during manufacture - Presumptive reversal under Rule 6(3) of the Cenvat Credit Rules, 2002 - Application of erstwhile Rules 57CC and 57DCenvat credit - Maintenance of separate accounts for common inputs - By-product / waste arising inevitably during manufacture - Presumptive reversal under Rule 6(3) of the Cenvat Credit Rules, 2002 - Whether respondent was liable to pay the presumptive amount under Rule 6(3) because Hydrochloric Acid, a common input, was used in manufacture of both dutiable Gelatin and exempted Di-Calcium Phosphate and separate accounts were not maintained - HELD THAT: - The Court found on the material facts that Hydrochloric Acid was wholly used in the manufacture of the dutiable product Gelatin and that the Mother Liquor (from which Di-Calcium Phosphate is obtained) emerges inevitably as a waste/by-product in the process; there was no deliberate or distinct use of any portion of Hydrochloric Acid for manufacturing the exempted product. Under Rule 6(1)-(3) credit is disallowed to the extent inputs are used in manufacture of exempted goods and sub rule (2) requires separate accounts where inputs are used for both dutiable and exempted final products; sub rule (3) prescribes presumptive payment where separate accounts are not maintained. Applying the statutory scheme to the manufacturing process, the Court held that because the entire quantity of Hydrochloric Acid was used for Gelatin and the Mother Liquor was an inevitable by product, Rule 6 did not operate to require separate accounting or presumptive reversal in the facts of this case. The Court relied on the principle that where emergence of a by product is inevitable and the identical quantity of input is simultaneously used for the dutiable product, the mere existence of the by product does not negate entitlement to Cenvat credit or attract reversal prescribed for deliberate use in exempted production. The Court concluded that requiring payment under Rule 6(3) would result in double recovery of duty on the same input.No liability to pay the presumptive amount under Rule 6(3); Rule 6(2) not attracted as the Mother Liquor is an inevitable by product and the Hydrochloric Acid was used for manufacture of dutiable Gelatin.Application of erstwhile Rules 57CC and 57D - Obligation of manufacturer of dutiable and exempted goods - Whether the Tribunal erred in applying erstwhile Rules 57CC and 57D (Central Excise Rules, 1944) when the present proceedings arise under the Cenvat Credit Rules, 2002/2004 - HELD THAT: - The Court observed that, in the peculiar facts of this case, it is immaterial whether provisions analogous to Rules 57CC and 57D of the Central Excise Rules, 1944 exist in the Cenvat Credit Rules, 2002/2004 because the determinative question was whether the input was used for manufacture of exempted goods or whether the product arising was an inevitable by product of the dutiable manufacture. Having held that the Mother Liquor is a by product inevitably produced in the process of making Gelatin and that Rule 6 does not require reversal, the Court found no legal infirmity in the Tribunal's outcome even if the Tribunal relied upon earlier decisions under the erstwhile Rules.Tribunal's application of earlier decisions and reference to erstwhile Rules 57CC/57D does not vitiate the result; the point is immaterial in view of the factual finding and legal conclusion reached.Final Conclusion: The appeal is dismissed. The Tribunal's order was upheld: no obligation arose to reverse Cenvat credit or pay the presumptive amount in respect of Hydrochloric Acid used in manufacture of Gelatin, and the Tribunal's reliance on earlier rules does not warrant interference. Issues Involved:1. Requirement to pay an amount equal to 8% or 10% of the value of exempted goods under Rule 6(3)(b) of Cenvat Credit Rules, 2002/2004.2. Error in law by CESTAT in applying Rules 57CC and 57D of erstwhile Central Excise Rules, 1944.Issue 1: Requirement to Pay Amount Under Rule 6(3)(b) of Cenvat Credit Rules, 2002/2004The appellant-revenue challenged the Tribunal's order, arguing that the assessee used Hydrochloric Acid, a common input, in the manufacture of both dutiable goods (Gelatin) and exempted goods (Di-Calcium Phosphate). The assessee did not maintain separate accounts for the inputs as required under Rule 6(2) of the Cenvat Credit Rules, 2002. Consequently, the revenue contended that the assessee was liable to pay an amount as prescribed under Rule 6(3). The Tribunal, however, set aside the order of the Commissioner, leading to the current appeal.The court noted that the manufacturing process of Gelatin inevitably produces a by-product, Mother Liquor, which is then used to manufacture Di-Calcium Phosphate. The entire quantity of Hydrochloric Acid is used in the manufacture of Gelatin, and the emergence of Mother Liquor is an inevitable by-product. Therefore, the court held that the entire quantity of input is used for the dutiable product (Gelatin), and the by-product (Mother Liquor) does not necessitate maintaining separate accounts or paying the amount under Rule 6(3).Issue 2: Error in Law by CESTAT in Applying Rules 57CC and 57D of Erstwhile Central Excise Rules, 1944The revenue argued that the Tribunal erred in applying Rules 57CC and 57D of the erstwhile Central Excise Rules, 1944, which were not applicable under the new Cenvat Credit Rules, 2002/2004. The court, however, found that the facts of the case did not require the application of Rule 6(2) or Rule 6(3) of the Cenvat Credit Rules, 2002, since the entire input (Hydrochloric Acid) was used in the manufacture of Gelatin. The court referenced the Supreme Court decision in Commissioner of Central Excise, Mumbai v. National Organic Chemical Industries Limited, which held that the emergence of by-products during the manufacturing process does not necessitate denial of benefits or additional obligations under the rules.The court concluded that the Tribunal's reliance on the Bombay High Court decision in Rallis India Limited v. Union of India was appropriate. The decision held that by-products arising during the manufacturing process of dutiable goods do not require the manufacturer to reverse credit or pay a presumptive amount under the rules.ConclusionThe court found no legal infirmity in the Tribunal's order and dismissed the appeal, stating that no substantial question of law arose from the Tribunal's decision. The court emphasized that the entire input was used for the dutiable product, and the by-product's emergence did not trigger the requirements of Rule 6(2) or Rule 6(3) of the Cenvat Credit Rules, 2002/2004.