2007 (11) TMI 276 - SC - Central Excise

SC dismisses department appeals against GAIL's classification of Lean Gas under chapter 2611.21 with nil duty rate

COMMISSIONER OF CENTRAL EXCISE Versus GAS AUTHORITY OF INDIA LTD.

The SC dismissed the department's appeals challenging GAIL's classification of Lean Gas under chapter 2611.21 with nil duty rate. The department alleged ... Modvat credit under Rule 57D - Whether Lean Gas produced by Gas Authority of India Ltd. (GAIL) is a manufactured marketable final product or by-product - alleged by the Department that assessee had cleared Lean Gas in bulk u/ch 2611.21 claiming nil rate of duty - HELD THAT:- As can be seen from the extract quoted from the show cause notice, which is the foundation of the Demand made by the Department, Lean Gas is a by-product which emerges when LPG is extracted from natural gas. If the case of the Department itself in the show cause notice was that Lean Gas is a by-product, then we fail to understand as to the basis for denying the benefit of Modvat credit to the assessee during the relevant period (October 1998 to January 1999) under Rule 57D. By-product and not a final product - We are in agreement with the view expressed by the Tribunal that nowhere in the show cause notice it has been alleged by the Department that Lean Gas is a final product. Ultimately, an assessee is required to reply to the show cause notice and if the allegation proceeds on the basis that Lean Gas is a by-product, then there is no question of the assessee disputing that statement made in the show cause notice. In the present case, the Tribunal has recorded that clearance was given to GAIL to prefer an appeal to the Tribunal against the order passed by the adjudicating authority and Commissioner Appeals. However, no such clearance has been given in favour of the Central Government which had preferred the present civil appeals. However, we do not wish to await the said clearance for the simple reason that in the present case we are dismissing the civil appeals filed by the Department on the factual aspect, namely, that in the show cause notice, there is no allegation that Lean Gas is the final product. Appeals stand dismissed. The core legal question presented for determination is whether Lean Gas produced by the Gas Authority of India Limited (GAIL) constitutes a manufactured marketable final product or a by-product under the Central Excise Act, 1944, specifically in the context of entitlement to Modvat credit under the Central Excise Rules, 1944.The dispute arose from a show cause notice issued by the Central Excise Department alleging that Lean Gas was a by-product resulting from the manufacturing process of extracting LPG from natural gas and that the assessee had failed to pay excise duty on Lean Gas as required under Rule 57CC of the Central Excise Rules. The Department contended that Lean Gas was a final product cleared as Natural Gas under Chapter Heading 2611.21, claiming nil rate of duty, and thus the assessee was not entitled to Modvat credit. Conversely, the assessee claimed entitlement to Modvat credit under Rule 57D, which protects credit against denial or variation when inputs are contained in waste, refuse, or by-products arising during manufacture.The principal issues considered are:Whether Lean Gas is a by-product or a final product for the purpose of excise duty and Modvat credit.The applicability of Rule 57D (credit not to be denied or varied in certain circumstances) versus Rule 57CC (adjustment of credit on inputs used in exempted final products) to the facts.The validity of the Department's demand for duty adjustment based on the classification of Lean Gas.Issue-wise detailed analysis:1. Classification of Lean Gas as By-product or Final ProductThe legal framework involves the Central Excise Act, 1944 and the Central Excise Rules, 1944, particularly Rules 57D and 57CC. Rule 57D protects the assessee's right to credit where inputs are contained in waste, refuse, or by-products arising during manufacture, even if such by-products are exempt or chargeable to nil duty or not specified as final products. Rule 57CC requires adjustment of credit where inputs are used in exempted final products, mandating payment of an amount equal to 8% of the price charged on such exempted products.Precedents emphasize that the classification of a product as a by-product or final product is critical in determining the applicability of these provisions. The Court's interpretation focused on the foundational document-the show cause notice-which explicitly described Lean Gas as a by-product arising after the extraction of LPG from natural gas.The Court reasoned that since the Department's own allegation in the show cause notice was that Lean Gas is a by-product, it is inconsistent and untenable for the Department to deny the benefit of Modvat credit to the assessee under Rule 57D. The Court highlighted that the show cause notice is the foundation of the demand, and the assessee must respond to the allegations as framed therein. Since the Department did not allege in the show cause notice that Lean Gas was a final product, the question of entitlement to credit under Rule 57D versus adjustment under Rule 57CC does not arise on the facts of the case.The Court declined to examine the broader legal question of classification beyond the factual matrix presented, emphasizing the principle that an assessee cannot be required to meet allegations not made in the foundational notice.2. Entitlement to Modvat Credit under Rule 57D versus Adjustment under Rule 57CCRule 57D protects the credit of specified duty on inputs used in or contained in by-products or waste arising during manufacture, even if such by-products are exempt or chargeable to nil duty. Rule 57CC mandates an adjustment or payment of duty equivalent to 8% of the price where inputs are used in exempted final products.The Department's contention that Lean Gas was a final product would trigger Rule 57CC, requiring adjustment of credit. However, since the show cause notice treated Lean Gas as a by-product, Rule 57D applies, entitling the assessee to maintain the credit without adjustment.The Court's application of law to facts concluded that the Department's own foundational document negated the basis for invoking Rule 57CC, thereby entitling the assessee to the benefit of Rule 57D during the relevant period.3. Treatment of Competing ArgumentsThe Department argued that Lean Gas was a final product and hence not eligible for credit under Rule 57D. The assessee relied on the show cause notice's characterization of Lean Gas as a by-product and the protective provisions of Rule 57D.The Court treated the Department's foundational allegation as determinative, rejecting the Department's later contention without a formal allegation in the show cause notice. The Court emphasized procedural fairness and the principle that an assessee must respond to the allegations as framed, not to new allegations introduced later.4. Additional ObservationsThe Court noted a prior directive in a related case that disputes involving government ministries and public sector undertakings should be examined by a designated Committee before litigation. Although the Department had not obtained clearance to file the appeal, the Court proceeded to dismiss the appeals on the factual ground stated, without awaiting such clearance.Significant holdings include the following verbatim excerpt encapsulating the Court's reasoning:'On the facts of the present case, as can be seen from the extract quoted from the show cause notice, which is the foundation of the Demand made by the Department, Lean Gas is a by-product which emerges when LPG is extracted from natural gas. If the case of the Department itself in the show cause notice was that Lean Gas is a by-product, then we fail to understand as to the basis for denying the benefit of Modvat credit to the assessee during the relevant period (October 1998 to January 1999) under Rule 57D.'The core principles established are:The characterization of a product as a by-product or final product in the foundational show cause notice is decisive for determining entitlement to Modvat credit or duty adjustment.An assessee cannot be compelled to respond to allegations not made in the show cause notice.Rule 57D protects credit on inputs contained in by-products or waste, even if exempt or nil-rated, while Rule 57CC applies to exempted final products requiring credit adjustment.Procedural fairness and adherence to the foundational allegations are paramount in excise duty proceedings.Final determinations on the issues are:Lean Gas was held to be a by-product as per the show cause notice and therefore the assessee was entitled to Modvat credit under Rule 57D.The Department's demand for duty adjustment under Rule 57CC was not sustainable on the facts.The appeals filed by the Department were dismissed on the factual ground that no allegation was made in the show cause notice that Lean Gas was a final product.