2008 (12) TMI 46 - HC - Central Excise

High Court clarifies input tax credit rule, rejects demand for presumptive amount under Rule 57CC

RALLIS INDIA LTD. Versus UNION OF INDIA

The High Court ruled in favor of the petitioner, holding that Rule 57CC did not apply as the petitioner maintained separate accounts for inputs used in ... Whether 8% of the amount is required to be discharged, before removal of by products/subsidiary products when such products are exempted from whole of duty – held that in case of common inputs used in dutiable and exempted goods, liability to pay 8/10% not arise for waste - Larger Bench decision of the CESTAT Mumbai is beyond the scope of reference where decision of Tribunal in the case of Binani Zinc Limited was approved by the larger Bench – petition succeeds Issues Involved:1. Applicability of Rule 57CC of Central Excise Rules, 1944/Rule 6 of Cenvat Credit Rules, 2002.2. Classification of HCL as an input in the manufacture of gelatin.3. Treatment of mother liquor as waste or final product.4. Obligation to maintain separate accounts for inputs used in exempted products.5. Applicability of Rule 57D in the context of waste, refuse, or by-products.6. Demand of 8% presumptive amount under Rule 57CC.Issue-wise Detailed Analysis:1. Applicability of Rule 57CC of Central Excise Rules, 1944/Rule 6 of Cenvat Credit Rules, 2002:The Larger Bench of the Tribunal held that the petitioner, who manufactured both dutiable and exempted final products by using duty-paid common inputs, was liable to pay an amount equal to 8% of the value of the exempted final product under Rule 57CC. This was based on the failure to maintain separate accounts regarding the inputs received and used in the manufacture of exempted goods. However, the High Court found this interpretation flawed, emphasizing that Rule 57CC applies only if the manufacturer is unable to reverse the exact amount of credit availed on inputs used in the manufacture of exempted final products due to not maintaining separate accounts.2. Classification of HCL as an input in the manufacture of gelatin:The Larger Bench erroneously concluded that HCL was not a necessary input in the manufacture of gelatin, relying on a Supreme Court decision related to sales tax law. The High Court clarified that this finding was beyond the scope of reference and contrary to the facts on record. The specific case of the revenue was that HCL was a common input used in the manufacture of both gelatin and phosphoryl 'A' & 'B', making Rule 57CC applicable.3. Treatment of mother liquor as waste or final product:The High Court emphasized that mother liquor arising in the manufacture of gelatin is a waste, not a final product. Under Rule 57D, credit of duty paid on inputs used in the manufacture of dutiable final products cannot be denied or varied merely because the input is contained in waste. Therefore, the petitioner was entitled to full credit of duty paid on HCL used in the manufacture of gelatin, and Rule 57CC was not applicable at the time of clearance of the waste mother liquor.4. Obligation to maintain separate accounts for inputs used in exempted products:The High Court found no merit in the revenue's contention that the petitioner was liable to maintain separate accounts to ascertain the quantity of HCL used in the manufacture of exempted phosphoryl 'A' and 'B'. Since the mother liquor was a waste, the petitioner was not required to reverse the credit of duty on HCL at the time of its clearance, and consequently, there was no obligation to pay the presumptive amount under Rule 57CC.5. Applicability of Rule 57D in the context of waste, refuse, or by-products:The High Court clarified that Rule 57D provides that credit of duty paid on inputs used in the manufacture of dutiable final products cannot be denied or varied even if the inputs are contained in waste, refuse, or by-products. The Larger Bench's interpretation that Rule 57D refers to waste, scrap, and by-products which are not excisable at all was rejected. The High Court emphasized that mother liquor, being a waste, did not attract Rule 57CC, and the petitioner was entitled to full credit of duty paid on inputs.6. Demand of 8% presumptive amount under Rule 57CC:The High Court held that the demand for a presumptive amount under Rule 57CC was not justified. Since mother liquor was a waste and not a final product, Rule 57CC was not applicable at the time of its clearance. The fact that mother liquor was further processed to manufacture exempted phosphoryl 'A' and 'B' did not attract Rule 57CC. The High Court concluded that the liability to pay the presumptive amount under Rule 57CC would arise only if the waste mother liquor was considered a final product, which was not the case.Conclusion:The High Court set aside the decision of the Larger Bench dated 13-12-2006 and the order in original dated 23-12-2004, ruling in favor of the petitioner. The High Court emphasized the correct interpretation of Rules 57C, 57CC, and 57D, and clarified that the petitioner was entitled to full credit of duty paid on HCL used in the manufacture of dutiable gelatin, without the obligation to pay the presumptive amount under Rule 57CC for the clearance of waste mother liquor.