2014 (5) TMI 253 - SC - Central Excise

Supreme Court allows Modvat/Cenvat Credit for exempt product inputs, exempts sulphuric acid sale from excise duty

The Supreme Court upheld the High Court's decision in favor of the respondents, allowing them Modvat/Cenvat Credit for inputs used in manufacturing exempt ... Modvat/Cenvat credit - by-product versus final product - Rule 57CC - adjustment of credit and maintenance of separate inventory/accounts - Rule 57D - credit not to be denied on account of waste, refuse or by-product - entitlement to credit as assessed on date of entitlement - challenge to vires of subordinate ruleModvat/Cenvat credit - by-product versus final product - Rule 57CC - adjustment of credit and maintenance of separate inventory/accounts - Rule 57D - credit not to be denied on account of waste, refuse or by-product - Entitlement of manufacturer to avail Modvat/Cenvat credit on inputs where a by product (sulphuric acid, mother liquor, etc.) emerges and is cleared at nil/exempt duty; and whether Rule 57CC applies to such by products. - HELD THAT: - The Court accepted the factual, technological and commercial position that in the manufacture of non ferrous metals (zinc, copper) and in the gelatin process, substances like sulphuric acid or mother liquor emerge as by products arising inevitably as a technological necessity and that the feedstock (ore concentrate or input) is wholly consumed in the primary product. On that factual foundation the Court held that Rule 57CC - which operates where common inputs are used in the manufacture of two or more final products (one dutiable and another exempt) and requires separate inventory/accounts or an 8% adjustment - is not attracted where the goods cleared without duty are by products and not final products produced from a share of the common input. The Court construed Rule 57CC in the scheme of Modvat/Cenvat rules read with Rule 57A, 57B and 57D, and concluded that Rule 57D protects credit where part of inputs results in waste, refuse or by product; equating by product to a final product would contradict commercial reality and the combined statutory scheme. Consequently, where the factual situation is that the by product emerges incidentally and no part of the primary input is traceable to the by product, maintenance of separate records of the input for the by product is impossible and the mischief targeted by Rule 57CC is not attracted. [Paras 19, 20, 21, 26, 27]Modvat/Cenvat credit taken on inputs was not liable to be disallowed or subjected to the 8% adjustment under Rule 57CC when the goods cleared at nil/exempt duty were by products emerging as a technological necessity; Rule 57D shields such credit.Entitlement to credit as assessed on date of entitlement - challenge to vires of subordinate rule - Maintainability of writ petitions filed at show cause notice stage and the scope of judicial review when vires of the rules is challenged. - HELD THAT: - The Court rejected the contention that the writ petitions were premature merely because show cause notices had been issued. It noted that the petitions also challenged the vires of the relevant rules and that the same legal question was the subject of other statutory proceedings; the High Court therefore rightly entertained the writs and proceeded to decide the legal questions on merits. The Court proceeded to adjudicate the substantive issues rather than remit for decision at the show cause stage or insist on alternative remedies. [Paras 14, 28]Writ petitions challenging the impugned rules and the show cause notices were maintainable and properly adjudicated on merits.Final Conclusion: Appeals dismissed. The Court affirmed that where goods cleared at nil/exempt duty are true by products arising as a technological necessity and no part of the common input is traceable to them, Rule 57CC does not apply and Modvat/Cenvat credit already taken need not be adjusted or reversed; the High Court and Tribunal decisions in favour of the assessees are upheld, and the writ petitions were properly entertained and decided on merits. Issues Involved:1. Entitlement of Respondents/Assessees to Modvat/Cenvat Credit for inputs used in the manufacture of exempt or nil duty final products.2. Requirement for assessees to maintain separate accounts for inputs used in dutiable and exempted goods.3. Liability arising from failure to maintain such separate accounts.4. Applicability of Rule 57CC of the Central Excise Rules, 1944, Rule 57AD of the Central Excise Rules, 2000, and Rule 6 of the Cenvat Credit Rules, 2004.5. Validity of the show cause notice issued to the assessee.6. Constitutional validity of Rule 6 of the Cenvat Credit Rules, 2004.Issue-Wise Detailed Analysis:1. Entitlement to Modvat/Cenvat Credit:The central issue across all appeals was whether the respondents were entitled to Modvat/Cenvat Credit on inputs used in the manufacture of final products that were either exempt from duty or subject to nil duty. The High Court had previously ruled in favor of the respondents, interpreting Rule 57CC and Rule 57D to allow such credit. The Supreme Court upheld this interpretation, emphasizing that the respondents had used the entire quantity of zinc concentrate for zinc production, with sulphuric acid emerging as a by-product due to technological necessity. The Court noted that sulphuric acid should be treated as a by-product, not a final product, thereby entitling the respondents to the credit.2. Requirement to Maintain Separate Accounts:The Revenue argued that the respondents were required to maintain separate accounts for inputs used in the production of both dutiable and exempted goods under Rule 57CC. The Supreme Court, however, agreed with the High Court's interpretation that such a requirement did not apply in cases where the by-product (sulphuric acid) emerged as a technological necessity and not as a final product. The Court held that the respondents had maintained appropriate records for zinc concentrate used in zinc production, making it impossible and unnecessary to maintain separate records for by-products.3. Liability for Failure to Maintain Separate Accounts:The Revenue contended that the respondents should pay 8% excise duty on the value of sulphuric acid sold to fertilizer plants under exemption, as per Rule 57CC. The Supreme Court rejected this argument, ruling that the mischief of recovery of 8% under Rule 57CC on exempted sulphuric acid was not attracted because the by-product status of sulphuric acid did not necessitate separate accounts.4. Applicability of Relevant Rules:The Supreme Court examined the applicability of Rule 57CC, Rule 57AD, and Rule 6. The Court concluded that Rule 57CC did not apply to by-products like sulphuric acid, which emerged as a technological necessity. The Court emphasized that Rule 57D, which states that credit should not be denied for inputs contained in any waste, refuse, or by-product, was applicable. The Court held that interpreting Rule 57CC to apply to by-products would obliterate the distinction between by-products and final products, which was not the legislative intent.5. Validity of the Show Cause Notice:The Revenue argued that the High Court should not have entertained the writ petitions challenging the show cause notice at a premature stage. The Supreme Court dismissed this argument, noting that the writ petitions also challenged the vires of Rule 57CC, which justified their consideration. The Court found that addressing the constitutional validity of the rule at the show cause stage was appropriate.6. Constitutional Validity of Rule 6:The respondents had challenged the constitutional validity of Rule 6 of the Cenvat Credit Rules, 2004. The High Court did not rule on this issue directly but interpreted the rule in a manner that avoided constitutional issues. The Supreme Court upheld this approach, agreeing with the High Court's interpretation that the rule did not apply to by-products like sulphuric acid.Conclusion:The Supreme Court dismissed the appeals filed by the Revenue, affirming the High Court's interpretation of the relevant rules. The Court held that the respondents were entitled to Modvat/Cenvat Credit for inputs used in the manufacture of by-products like sulphuric acid, and the requirement to maintain separate accounts did not apply in this context. The Court also upheld the validity of the writ petitions challenging the show cause notices and the interpretation of Rule 6 of the Cenvat Credit Rules, 2004.