TMI Blog2004 (4) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... entral Excise Department vide R.C. No. 12/TTN/CITY/95 and are engaged in the manufacture of Copper Anode falling under Chapter 7402 of the First Schedule to the Central Excise Tariff Act, 1985. They avail the benefit of Cenvat/Modvat credit. The principal raw material used for the manufacture of Copper Anode is Copper Concentrate which is imported from various countries. The copper anode so manufactured at their unit at Tuticorin is cleared on payment of Central Excise duty to their own unit situated at Silvasa, where the Copper anode is converted into Copper Cathode and other finished products such as Copper rods/wires and are sold. During the course of manufacture of Copper anode at the Tuticorin unit, two by-products namely Sulphur-di-oxide and granulated slag emerge. The manufacturing process does not come to an end at that stage and in the continuous and integrated process of manufacture, sulphur-di-oxide is further used in the manufacture of Sulphuric acid falling under Tariff Heading 2807 of the First Schedule to the CETA, 1985. A portion of the sulphuric acid is further used captively in the manufacture of Phosphoric acid falling under heading 2809 of the First Schedule of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mped to the storage tank. After the sulphur-di-oxide is received through the gas duct into the mixing chamber and later the drying tower, the inputs such as caustic soda flakes, ferric sulphate, ferric chloride, Indion, Magnafloc and other chemicals are added in the process for the sulphur-di-oxide to become sulphuric acid. This sulphuric acid is cleared from the factory to various buyers which include fertilizer unit. Appellants pay 16% duty on Sulphuric Acid for sale to independent buyers whereas when the same are cleared to fertilizer units for manufacture of fertilizers, these are removed without payment of duty under Chapter X Procedure read with Central Excise (Removal of Goods) at Concessional Rate of Duty for Manufacture of Excisable Goods Rules, 2001 read with Notification No. 3/2001, dated 1-3-2001 and No. 6/2002, dated 1-3-2002, respectively. A portion of sulphuric acid is captively consumed in the manufacture of phosphoric acid by reacting with rock phosphate. The process of manufacture consists of reacting rock phosphate and sulphuric acid in three reactors. The temperature of the slurry in the reaction system is controlled by flash cooler system which removes excess h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as by-products which in turn is used for manufacture of sulphuric acid and phosphoric acid in the integrated plants located within the factory premises. The credit availed for copper concentrate is utilised by the appellants to pay the duty of excise on all the final products. Therefore, copper concentrate is the basic input used in or in relation to the manufacture of sulphuric acid and phosphoric acid inasmuch as without the copper concentrate these two gases cannot be produced. The other inputs used in or in relation to the manufacture of final products are ferric sulphate, ferric chloride, Indion, Magnfloc, Caustic soda flakes. 3.3 The sulphuric acid is captively consumed in the manufacture of phosphoric acid which is partly cleared without payment of duty for manufacture of fertilizer products, under Chapter X Procedure, etc. as well as cleared at the factory gate on payment of duty. Therefore, the appellants should have maintained a separate inventory and accounts for the receipt and use of above-said inputs namely, Copper Concentrate, Ferric Sulphate, Ferric Chloride, Indion, Magnfloc, Caustic Soda flakes used in or in relation to the manufacture of Phosphoric acid whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal against the orders of the Commissioner (Appeals) whereby the Commissioner has set aside the two separate orders of the original authority and allowed the appeal of the assessees relying on the decision of the Tribunal in the case of Aarthi Drugs Ltd v. CCE, reported in [2001 (133) E.L.T. 385 (Tri.) = 2001 (45) RLT 213]. The facts in the Revenue appeals are similar. The period involved in Appeal No. E/450/02 is 4/2000 to 8/2000 and in Appeal No. E/451/2002 is 1/2000 to 3/2000. 5. The matter was finally heard on 5-12-2003. After the hearing was over, learned Counsels Shri N. Venkataraman and Shri S. Muthu Venkataraman for the appellants submitted a written submission on 10-12-2003 which was taken on record. Shri V.T.K. Nayanar, Jt. CDR along with Smt. R. Bhaghya Devi, SDR also submitted Synopsis on 12-12-2003, of the oral submissions they had made, in the Court on 5-12-2003. This has also been taken on record. 6. Shri N. Venkataraman and Shri Muthu Venkataraman, learned Counsels appearing for the appellants on 5-12-2003 referred to the grounds of appeal and also to the written submissions submitted on 5-12-2003 (Date of Hearing). They then proceeded to explain the manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated with rock phosphate to manufacture phosphoric acid. (f) No Modvat credit whatsoever has been availed on any of the inputs employed in the sulphuric acid plant and phosphoric acid plant while processing sulphur-di-oxide into sulphuric acid or while processing sulphuric acid into phoshporic acid. In other words, inputs required for sulphuric acid are waste gas in the form of Sulphur-di-oxide and duty paid inputs like ferric sulphate, ferric chloride, indion, magnfloc, caustic soda flakes and other chemicals against which no Cenvat credit has been taken. This aspect has been clearly verified and certified by Jurisdictional Supdt. of Central Excise of the appellants and certificate dated 19-9-2003 is enclosed. (g) The entire process activity is two fold : (i) Employment of duty paid copper concentrate in the smelter for the manufacture of dutiable copper anodes during which process sulphur-di-oxide emerges as a non-excisable product. (ii) The duty paid copper concentrate is exhausted fully in the manufacture of dutiable copper anodes and sulphur-di-oxide emerges only as a by-product which is conceded at every point of time by the learned Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss ethylene glycol wontedly to produce the methanol. It is clear that the appellants are not engaged in the production of methanol but in the production of polyester fibre. The Tribunal erred when it held that appellants were not entitled to a part of the credit of the duty since ethylene glycol when it reacts with DMT also gives rise to Methanol. Scenario under the Modvat Regime between 1-3-86 to 2. 3-9-94 : Bearing the spirit of the decision of the Supreme Court in Swadeshi Polytex the lawmakers when they introduced Modvat Scheme, brought into force a specific provision in the form of Rule 57D (1) of the Central Excise Rules which reads as under: Credit of specified duty allowed in respect of any inputs shall not be denied or varied on the ground that part of the inputs is contained in any waste, refuse or by-product arising during the manufacture of the final product, whether or not such waste, refuse or by-product is exempt from the whole of the duty of excise leviable thereon or is chargeable to nil rate of duty or is not specified as a final product under Rule 57A. While introducing Rule 57D Central Govt. also brought into force Rule 57C which reads as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt from the whole of duty of excise or chargeable to nil rate of duty. Occasions arose wherein a manufacturer could be engaged both in the manufacture of dutiable final products and exempted final products using duty paid common inputs. Since Rule 57C did not allow credit on inputs used in exempted final product, manufacturers had to reverse the corresponding input duty on such inputs used in the manufacture of exempted final products. This exercise was also approved by the Supreme Court in the case of Chandrapur Magnet Wires Private Ltd. v. Collector, 1996 (81) E.L.T. 3 (S.C.) wherein the Court was pleased to hold The manufacturer may take credit of duty paid on all the inputs used in the manufacture of final product on which duty will have to be paid. This can be done only if the credit of the duty paid on the inputs used in the exempted products is debited in the credit account before the removal of the exempted final products . If this debit entry is permissible to be made, credit entry for the duties paid on the inputs utilised in the manufacture of final exempted product will stand deleted in the accounts of the assessee. In such a situation, it cannot be said that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacture of dutiable final products and exempted final products. It in no way substituted or deleted or replaced or modified Rule 57D of the Central Excise Rules. This Rule continues to exist in the Statute book in the form of 57D till 31-3-2000. At the time of introduction of the Cenvat Regime, a provision similar to Rule 57D was not introduced. This gave rise to a lot of doubts. At this juncture, the Hon ble Central Board of Excise and Customs was pleased to clarify that Cenvat rules and procedures are actually a simplified mechanism. It in no way would take away the right to retain the input credit contained in by-products, waste and refuse and this position was clarified by the Board vide its circular No. B-4/7/2000-TRU, dated 3-4-2000 (para 5). The purport of rule 57cc, rule 57ad and rule 6 of the cenvat rules are as follows : (a) The rigors would apply at the outset only in such situations where a manufacturer is engaged in the manufacture of dutiable final products and exempted final products employing duty paid inputs in the said process. (b) Such a manufacturer is given two options viz., he shall maintain separate accounts for receipt, consumption and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. As referred above, Rule 57CC/57AD/Rule 6 of the Cenvat Rules can be invoked only in such cases where the inputs are separable and usable or capable of being used separately in two independent streams of manufacture namely dutiable and exempted final products per contra Rule 57D or Board Circular dated 3-4-2000 do not cover such contingencies. They cover only such cases where inputs are employed wholly and entirely in the manufacture of dutiable final products in the course of which by-product, waste or refuse may emerge and a portion of the inputs may get contained in the by-product, waste or refuse. To put it in other words, the mother rule for Rule 57CC/AD/Rule 6 of the Cenvat Credit Rules is Rule 57C which permitted reversal of input credit on such inputs used in the manufacture of exempted final products. This was also approved by the Supreme Court in Chandrapur Magnet Wires Private Limited case. The decision of Chandrapur Magnet Wires Private Limited was got over by bringing in Rule 57CC/Rule 57AD and Rule 6 of the Cenvat Rules per contra the source for Rule 57D is the decision of the Supreme Court in the case of Swadeshi Polytex Limited v. Collector of Central Excise, 1989 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate to manufacture the required quantity of copper anode. If this is so, the situation is covered only under the decision of Swadeshi Polytex, Rule 57D and later Board Circular dated 3-4-2000 and not Rule 57CC/57AD/Rule 6 of the Cenvat Credit Rules. 9. They also submitted that there is no basic anomaly between the show cause proceedings and the order of the Commissioner of Central Excise. All the show cause notices issued by the Department emphatically state that sulphur-di-oxide gas is an intermediate product and is captively consumed in the manufacture of sulphuric acid and phosphoric acid, respectively, whereas the order of the Commissioner dated 27-3-2003 emphatically concedes that sulphur-di-oxide is a by-product. The specific paras and page numbers have been referred already and therefore not reiterated. Once it is conceded that sulphur-di-oxide gas is a by-product there is no option for the revenue except to classify the case only under Rule 57D and not under Rule 6 of the Cenvat Credit Rules. Appellants have already stated that sulphur-di-oxide is a hazardous gas and cannot be vented to air because of environmental compulsions. This Sulphur-di-oxide gas is not only a by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of respective final products and therefore it is self evident that whenever final products are to be produced, Central Government has employed the expression used in the manufacture or used in or in relation to manufacture . And whenever it does involve any manufacturing process but a natural occurrence Central Government has employed the expression inputs contained in waste, refuse or by-product . 10. Relating the legal position to the facts of the case they submitted that it is clear that copper concentrate besides copper contains several impurities including sulphur. When copper concentrate is treated with oxygen in the smelter copper gets separated or processed into copper anode while the sulphur impurities after interaction with oxygen in the smelter becomes sulphur-di-oxide. In other words, sulphur in the input copper concentrate becomes sulphur-di-oxide and therefore the input is contained in the non-excisable by-product namely sulphur-di-oxide and consequently covered under Rule 57D and Board Circular dated 3-4-2000. 11. Having proved that non-excisable sulphur-di-oxide emerges in the course of manufacture of dutiable copper anodes question that arises for cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Central Excise - 1989 (44) E.L.T. 794 (S.C.) This was a decision rendered under the proforma regime (set off duty on inputs) wherein provision similar to Rule 57D which permits retention of Modvat credit on inputs even if the same is used in the manufacture of dutiable final products and emergence of by-products, waste or refuse is not to be denied. (Para 20) It is clear that the Tribunal should have held that even though a part of ethylene glycol was contained in the by-product methanol, yet the credit of duty could not be reduced to the extent of the ethylene glycol contained in the methanol as ineligible. It appears that methanol arises as a part and parcel of the chemical reaction during the process of manufacture when ethylene glycol interacts with DMT to produce polyester fibre. It is not possible to use a lesser quantum of ethylene glycol to prevent methanol from arising for producing a certain quantum of polyester fibre. Thus the quantity of ethylene glycol required to produce a certain quantum of polyster fibre is determined by the chemical reaction. It may be mentioned herein that it is not as if the appellants have used exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manure. Sulphuric acid and phosphoric acid cleared to fertiliser units are not liable to Central Excise duty the similarity being biomanure falling under 3105 is chargeable to nil rate of duty. An amount of 8% is sought to be demanded on sulphuric acid and phosphoric acid the similarity being the same amount of 8% was demanded on the sale price of biomanure. In the facts and circumstances, this Hon ble Tribunal vide its final order dated 1-12-2003 was pleased to hold that provisions of Rule 57CC are inapplicable to biomanure since duty paid chemicals are employed in the manufacture of sugar and not biomanure the similarity being duty paid copper concentrate are employed only in the manufacture of copper anode and not sulphuric acid or phosphoric acid. Therefore, the ruling of this Hon ble Tribunal should be adopted and followed in the present facts and circumstances and assessee s appeal should be allowed and department s appeal should be dismissed. (iii) Aarti Drugs Limited v. Commissioner of Central Excise, 2001 (133) E.L.T. 385 Mother Liquor emerging in the process of manufacture of methyl nitroimidazole is a by-product. Manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted continues to be good Law and has not been dissented or differed till date. (v) CCE v. Bazpur Co-operative Sugar Factory Limited - 2003 (59) RLT 398 : In this case, in the process of manufacture of sugar, sugarcane waste as pressmud emerge. This pressmud was cleared by the assessee without payment of duty. A demand was made under Rule 57CC for an amount equivalent to 8%. The Tribunal was pleased to hold that when pressmud itself is non-excisable, Rule 57CC is inapplicable. Applying the ratio to the above facts, Revenue obviously cannot demand any amount on the by-product sulphur-di-oxide and Revenue has not done so. Once the chainlink is broken, the further processing of this sulphur-di-oxide with any other inputs on which no input credit has been claimed cannot invite the rigors of Rule 57CC to state or suggest copper concentrate is the input. 13. Appellants sought to distinguish the various case laws relied by the Department by submitting the following: GTC India v. Commissioner of Central Excise - 2001 (129) E.L.T. 513, Assessee took Modvat credit on cut tobacco which was used in the manufacture of cigarettes and in the process tobacco refuse in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sins Terpenes Ltd. v. Collector of Central Excise, Chandigarh - 1997 (93) E.L.T. 451 (Tribunal) Kirloskar Oil Engines Ltd v. Collector of Central Excise, Pune - 1994 (73) E.L.T. 835 (Tribunal) Orissa Extrusions v. Collector of Central Excise, Bhubaneswar - 2000 (115) E.L.T. 30 (S.C.). 14. They further submitted that all these decisions have been rendered only under Rule 57C and not under Rule 57CC and they have no application. The decision of the Supreme Court in Orissa Extrusions was one considering the applicability of Rule 57C vis-a-vis Notification No. 180/88 and therefore they have no relevance to the facts of the case. As regards the other two tribunal rulings, these are again decisions under Rule 57C and not Rule 57CC and further more, these decisions are no longer good law in the light of two Larger Bench decisions in the case of CCE v. Ashok Iron and Steel Fabricators, 2002 (140) E.L.T. 277 and Raghuvar India Ltd. v. Commissioner, 2002 (140) E.L.T. 280. 15. It is the plea of the appellants that copper concentrate is employed only in the smelter which gives rise to copper anodes and emissions of sulphur-di-oxide in gaseous form. No other inp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot to give any findings whatsoever as to its applicability/non-applicability to the facts of the case. The presence of sulphur in the copper concentrate is not denied anywhere by the appellants. Sulphur-di-oxide emerges only because sulphur content in the copper concentrate reacts with oxygen in the smelter. Appellants have nowhere denied the presence of sulphur in copper concentrate.. The decision in the case of GTC is factually and legally distinguishable and the decisions referred in paras 38 and 39 are all with reference to Rule 57C and not Rule 57CC and these decisions are no longer good law as these have been reversed by Larger Bench decisions referred supra. 17. No reliance ought to have been placed by the Commissioner to Board Circular No. F. No. 267/12/2001-CX., dated 28-1-2002. Through the said circular, Board had clarified that Rule 57D will not apply since sulphur-di-oxide has been subjected to further process to manufacture sulphuric acid and phosphoric acid both of which are dutiable. This Board circular is no longer good law and sustainable for the following reasons : The Board circular is dated 28-1-2002 whereas the decision in the case of Aarti Drugs was ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manufacture of sulphuric acid and phosphoric acid in the integrated plants located within the factory. In the synopsis of the oral submissions made, he has invited our attention to Annexures II and III to the order-in-original which gives the chemical composition of typical copper concentrate imported from various countries such as Indonesia and Latin American to contend that the chemical composition indicates that copper concentrate is an ore containing around 35% of sulphur and other elements such as Iron, Silver etc. in varying proportions and the most important ores are sulphide Ores such as Chalcolate (Cu2S) and Chalcopyrite (CuFe S2) from which copper is usually extracted. He has also referred to the Book General Chemistry by Henry F. Holtzclaw, Jr and William R. Robinson wherein it is stated that Sulphur-di-oxide is produced commercially by burning free sulfur and by roasting (hearing in air) sulfide ores. It was argued that that since the appellants have cleared sulphuric acid and phosphoric acid partly on payment of duty and partly as exempted products, they should have maintained separate inventory and accounts for the receipt and issue of various inputs referred abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not hold good inasmuch as the words any input used in the Rule makes it clear that credit need necessarily be taken in respect of all the inputs to attract the mischief of sub-rule (2) of Rule 57AD. He has further submitted that copper concentrate has sulphur contents in the range of 30 - 35% depending upon the country of origin, addition to copper, iron and other elements in traces. Therefore, it cannot be said that sulphur is an impurity in the copper concentrate and for that matter any other elements are not impurities in the copper concentrate. He has further submitted that the department s case is that but for the use of copper concentrate, as the basic input, the emergence of sulphur-di-oxide would not have been possible and without sulphur-di-oxide, sulphuric acid and phosphoric acid could not have been manufactured. Therefore, the manufacture of sulphuric acid, phosphoric acid and copper anodes are linked to the basic input which is copper concentrate, in an integrated and uninterrupted process. He has also cited the following case laws in support of his plea for allowing the departmental appeals and for rejection of the appellants appeals : (1) CCE v. Ballarpu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e laws : Before Case Laws are furnished it is submitted that (a) at no point of time, either in the show cause notice or in any other proceedings, Revenue has alleged or stated that sulphur-di-oxide which gets emitted is an excisable product. Every show cause notice issued by the revenue on this issue only states that appellants are engaged in the manufacture of copper anode, sulphuric acid and phosphoric acid. There is no mention or allegation that appellants are manufacturers of sulphur-di-oxide gas. No reliance can be placed on the decision in the (b) case of CCE, Mangalore v. Mangalore Refinery and Petrochemicals Ltd. - 2002 (147) E.L.T. 788. The case of the Revenue that duty credit has been availed on sulphur-di-oxide and therefore it is excisable, cannot be of any avail. It is never the appellant s case that there is no excisable product as sulphur-di-oxide. Appellant s case is only confined to the fact as to whether the emission of sulphur-di-oxide gas within the factory is an excisable commodity. The ruling relied by the revenue nowhere indicates that the duty paid sulphur-di-oxide is one which had emitted during the process of copper smelting and in the manufacture o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er processing be made marketable . Reliance is placed on the decision of the Supreme (e) Court in M/s. Moti Laminates v. CCE - 1995 (76) E.L.T. 241 (S.C.) wherein the Hon ble Apex Court was pleased to hold that mere tariff entry is not sufficient and marketability is a must for levy of excise duty. It was contended by the Revenue that the (f) sulphur-di-oxide is consumed captively and therefore removed for further use. Consequently, it should be held as marketable and dutiable. In this connection, appellants rely on the decision of the Supreme Court in the case of Commissioner of Central Excise v. Ambalal Sarabhai Enterprises - 1989 (43) E.L.T. 214 (SC) wherein the Apex Court was pleased to hold that user in the captive consumption is not determinative of whether the article is capable of being sold in the market or known in the market as goods. Therefore it is a settled legal position that even captive consumption goods should satisfy the test of marketability before duty can be imposed on them. Reliance is placed on the Environment Protection (g) Rules, 1986. Schedule 1 issued under Rule 3 (Sl. No. 21) reveals that copper, lead and zinc smelting would result in particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-12-2003 after the matter was reserved on 5-12-2003 and after the appellants filed a further written submission on 10-12-2003. Their submissions are as under :- M/s. Sterlite Industries (I) Ltd., Tuticorin, 1. manufactures copper anodes falling under Chapter 7402 of the Central Excise Tariff, which are cleared on payment of duty. Copper anodes are manufactured from the principal raw material, copper concentrate, which is imported, on which Cenvat credit is taken. During the course of manufacture of copper anodes from copper concentrate sulphur-di-oxide emerges as a by-product. In a continuous, uninterrupted and integrated process of manufacture, sulphur-di-oxide gas is converted into sulphur-tri-oxide and then sulphuric acid. A portion of sulphuric acid is captively consumed for the manufacture of phosphoric acid by reacting with imported rock phosphate. Another portion of sulphuric acid is cleared without payment of duty under Chapter X Procedure. A portion of phosphoric acid is also cleared without payment of duty under Chapter X Procedure for the manufacture of fertilizer products by availing exemption notification 6/2002, dated 1-3-2002. The remaining portions of sulphuri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led). Water treatment chemicals - Water is used in the (iii) sulphuric acid plant to take the heat out from the process and for which cool water is to be circulated. The cool water comes from the cooling towers which contains some bacteria, corrosive elements and scaling elements. Water treatment chemicals are nothing, but chemicals which enable to remove the bacteria, corrosive agents and scaling agents from the above water. Caustic soda flakes used in the sulphuric acid (iv) plant to maintain pH (to keep the water neutral). De-foamer - used in phosphoric acid plant to remove (v) the foam while sulphuric acid reacts with rock phosphate. Sodium silicate - used in the gas cleaning plant (vi) which is located in the sulphuric acid plant to remove impurities from sulphur-di-oxide gas, i.e., removal of fluorine from sulphur-di-oxide gas. Hydrogen hydrate - to remove impurities from (vii) sulphuric acid in the sulphuric acid plant. Active silica - used in the phosphoric acid plant (viii) for balancing the reaction. Spak defoaming chemical used in the phosphoric (ix) acid plant. 4. Copper Concentrate Copper concentrate is the essential raw material from which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acture within the same factory of manufacture. While part of the sulphuric acid is cleared on payment of duty another part is cleared without payment of duty under the Chapter X Procedure. Further, one more portion of sulphuric acid is captively used for the manufacture of phosphoric acid within the same factory premises. Part of the phosphoric acid is cleared on payment of duty and part as exempted product. Rule 57AD of the Central Excise [Second Amendment 7. (Amendment)] Rules, 2000 states as follows : Cenvat credit (1) shall not be allowed on such quantity of inputs circumstances mentioned in sub-rule (2). Where (2) a manufacturer avails of Cenvat credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take Cenvat credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic acid does not hold good. Also, the assessee s contention that they have not taken Cenvat credit on 10 chemicals like water treatment chemicals, magnofloc, ferric chloride, ferric sulphate etc., also is of no avail in view of the language used in the sub-rule (2) which refers to any inputs . There is no dispute that the assessee has taken Cenvat credit on copper concentrate and maxtreat used in the smelter furnaces. As already stated, copper concentrate has sulphur 11. contents in the range of 30-35%, depending upon the country of origin, in addition to copper, iron and other elements in traces. We cannot call sulphur is an impurity in copper concentrate and for that matter any other elements are not impurities in the copper concentrate. The copper ore naturally occurs in this form in combination with various elements and during the metallurgical process while extracting copper metal, the other elements are eliminated stage by stage to obtain pure copper. The Department s case is that but for the use of copper concentrate, as the basic input, the emergence of sulphur-di-oxide would not have been possible and without sulphur-di-oxide, sulphuric acid and phosphoric acid could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ; those which, as a result on interaction with other chemicals or ingredients, might themselves undergo chemical or qualitative changes and in such altered form find themselves in the end- product; those which, like catalytic agents, which influencing and accelerating the chemical reactions, however, may themselves remain uninfluenced and unaltered and remain independent of any outside the end-products and those, as here, which might be burnt-up or consumed in the chemical reactions. The question in the present case is whether the ingredients of the last mentioned class qualify themselves as and are eligible to be called Raw- Material for the end-product. One of the valid tests, in our opinion, could be that the ingredient should be so essential for the chemical processes culminating in the emergence of the desired end product, that having regard to its importance in and indispensability for the process, it could be said that its very consumption on burning-up is its quality and value as raw material. In such a case, the relevant test is not its presence in the end-product, but the dependence of the end product for its essential presence at the delivery end of the process. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d fall within the expression in the manufacture of goods . This view has been reiterated by the Hon. South Zonal Bench of CEGAT in the case of Collector of Central Excise v. Seshasayee Paper Boards Ltd. reported in 1992 (61) E.L.T. 304 (Tri.). The issue before the Tribunal was whether hydrochloric acid and sulphuric acid being used for treatment of water can be considered as inputs used in or in relation to manufacture of paper. Hydrochloric acid was used for de-mineralisation of water, which is turned into steam. Specific use of hydrochloric acid resulted in the treated water fit for generation of steam after de-mineralisation of the same. This treatment has been done at the stage anterior to the start of the manufacturing process for generation of steam and its use therefore can be taken to be for treatment of water for making the water ready for use in the process of manufacture of paper. The Tribunal held that it is a Modvatable input. There is no dispute that copper concentrate is the 15. only input having a nexus with the process which is integrally connected with the ultimate production of phosphoric acid and sulphuric acid. The Hon. Madhya Pradesh High Court, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inction between intended final product and by-product. The said rules required the assessee to pay an amount equal to 8% of the price of the final product, cleared at NIL rate of duty even where the inputs have been directly or indirectly used in the manufacture of such final product and even where they are not contained in the said final product. The Bench also held that when it is not the credit originally taken that is being demanded, but an amount equal to 8% of the price of the exempted by-product, the erstwhile Rule 57D is not applicable. In page 2 of the paper book the appellants have 19. stated that sulphur-di-oxide being a hazardous gas, the same cannot be let out in open air and it is an environmental compulsion that it should be utilised for the manufacture of sulphuric acid. Whatever may be compulsions, so long as there is no dispute about the manufacturing of sulphuric acid, the demand raised by the Revenue is in order. On page 11 of the paper book they have stated that 20. the inputs required for sulphuric acid are waste gas in the form of sulphur-di-oxide and duty paid inputs like ferric sulphate, ferric chloride etc., on which no Cenvat credit has been availed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue that they have been denied the credit. The department is simply demanding 8 per cent of the price of the exempted product since they are manufacturing both dutiable and exempted products, using common inputs and are not maintaining separate accounts and inventories. No doubt, sulphur-di-oxide may be a by-product in the smelting operation of copper concentrate, but it is an intermediate product in the manufacture of sulphuric acid, as would be evident from the chain of reactions. Sulphur in the copper concentrate gets converted into sulphur-di-oxide on heating in the presence of air, which in turn is converted into sulphur-tri-oxide which ultimately is converted into sulphuric acid. Therefore, there is no anomaly in calling it as an intermediate product in the manufacture of sulphuric acid. Whether you call it as an intermediate product or as a by-product, in the absence of legal provisions parallel to the erstwhile Rule 57D in the current Cenvat Rules, the arguments of the appellants is not going to be in their defence. The other contention of the appellants that sulphuric acid is not excisable is totally contrary to facts. Their reliance on case law of Sukjit Starch and Chem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same in the factory of production in the process of manufacture of sugar. They have contended that the gas in question is impure sulphur-di-oxide which is not marketable and therefore not excisable. The Govt. observed that the very fact that the gas in question has been actually used in the manufacture of sugar answers the test of marketability of the goods and hence excisable. The Govt. also observed that the ratio of the Supreme Court judgment in the South Bihar Sugar Mills Ltd. case is not applicable to the present issue. In the case cited the Supreme Court held that kiln gas is not classifiable as carbon-di-oxide under the relevant tariff entry because it is not recognized in the trade as compressed carbon-di-oxide. 1994 (73) E.L.T. 906 (Tri.) - 25. Udaipur Phospates Fertilizers Ltd. v. Collector of Central Excise, New Delhi. In this case the appellants are manufacturing oleum of different grades and during the process of manufacture, sulphuric acid comes into existence as an intermediate product. The Tribunal held that it may be true that the appellants may not be marketing the sulphuric acid in this case but that does not mean that sulphuric acid is not goods or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levance to the facts in the present case since the said case also deals with retention of Modvat credit on inputs contained in the by-products under Rule 57D, which is not the case here. The case law of 30. South Bihar Sugar Mills Ltd. v. Union of India, reported in 1978 (2) E.L.T. (J 336) (S.C.), deals with the classification of kiln gases - whether it can be classified as carbon-di-oxide under the relevant tariff entry. The Hon. Supreme Court held otherwise on the ground that the mixture of gases produced from the kiln is known to both trade and in science as kiln gas, although one of its constituents is carbon-di-oxide, yet it is not known as carbon-di-oxide. There is no ambiguity about this decision that kiln gas cannot be carbon-di-oxide. This is not the case in respect of sulphur-di-oxide produced when copper concentrate is smelted. The appellant has not produced any technical evidence to show that the gas evolved on smelting of copper concentrate is something other than sulphur-di-oxide or it is a mixture of different gases. As already stated when copper concentrate is smelted, no gas other than sulphur-di-oxide can be produced, which can be supported with any amount of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and sulphur-di-oxide gas for removal of impurities in the juice. The treated juice is further heated to 102 degree centigrade in the secondary juice heaters and then pumped to clarifiers where the impurities are settled in the form of mud and the overflow as clear juice is separated. The muddy thick juice is mixed with fine powder of bagasse and further filtered in vacuum drums for extraction of the maximum amount of the juice. The mud filtrate so extracted is recycled into the juice extracted by the mills. The pressmud is removed from the Oliver station as a waste and used as manure. The clear juice is concentrated, bleached and then crystallized in the pan station. The product is dropped into the crystaliser and passed to centrifugal for separation of sugar and molasses. Molasses from the lower grade product goes out of the product. 34. As stated by the appellants themselves, pressmud or filter press emerges as a waste product during the preparation of cane juice for the manufacture of sugar. Similarly in the course of manufacture of Ethyl alcohol from molasses in the distillery plant, spent wash which is distillery effluent emerges. Both these products are non-excisable an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic of pressmud : (ii) Ammonium Bi-flouride - used for killing micro organism in the raw juice. (iii) Flocculants used for sedimentation of non-sugar elements in the juice. This is used by all sugar factories irrespective of whether they sell organic manure or not. (iv) De-naturants - This is added to alcohol to make it non-potable when it is sold in the market. (v) Sugar cane - it has got all ingredients required for a manure or fertilizer. The fertilizer elements and the quality in the 42. organic manure are obtained not from any of the Modvated inputs, but from the soil itself which contribute to the characteristic of sugar cane which in turn contribute to the characteristic of pressmud. The Commissioner (Appeals) in the case of 43. Sakthi Sugars Ltd., vide Order-in-Appeal No. 152/98 dropped the proceedings on the ground that the view taken by the lower authority that bio earth is also a final product and that they had also used the chemicals in the manufacture of bio earth is found to be erroneous. The chemicals used in the manufacture of sugar cannot be said to be the common inputs for manufacture of sugar and bio earth. However, in the case of E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur-di-oxide, which is converted to sulphur-tri-oxide, which in turn is converted into sulphuric acid, which again is converted into phosphoric acid. The inter-dependence of one compound for the formation of the other is the striking factor in this case. In the EID Parry case, the non-excisable waste product, pressmud, is further used for the manufacture of bio-compost. Bio-compost is totally exempt from duty. As stated by the appellants themselves, bio-compost can be prepared out of any waste, rotten vegetable or animal matter and even from garbage and the duty paid chemicals have no nexus to the formation of bio-compost. Bio-compost itself has been produced outside the factory premises. (v) In the Sterlite Industries case, Cenvat credit was availed on the basic input, copper concentrate, which is the source for the manufacture of subsequent compounds. In the EID Parry case, credit was availed on certain sugar chemicals used in the treatment of cane juice and both have no comparison. (vi) Sulphuric acid cannot be produced in the absence of sulphur-di-oxide, whereas bio-compost can be produced in the absence of pressmud. (vii) In the Sterlite Industries case, the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r used in the manufacture of Sulphuric acid falling under tariff heading 2807 of the First Schedule to the CETA, 1985. A portion of the sulphuric acid is further used captively in the manufacture of Phosphoric acid falling under heading 2809 of the First Schedule of the CETA, 1985 in conjunction with imported rock phosphate. The assessee clears Sulphuric Acid on payment of duty at the rate of 16% to independent buyers, whereas, they clear a part of it without payment of duty for manufacture of fertilizer following the procedure set out in Chapter X of Central Excise Rules, 1944 vide Notification No. 3/2001, dated 1-3-2001. The assessee continued to clear the Sulphuric Acid on payment of duty @ 16% to independent buyers, and after framing of the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 vide Notification No. 34/2001-CE (NT), dated 21-6-2001, they also cleared a part of it without payment of duty for manufacture of fertilizers under Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 (hereinafter referred as CERGCMEGR) read with Notification No. 6/2002, dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the manufacture of phosphoric acid by reacting with rock phosphate. The process of manufacture consists of reacting rock phosphate and sulphuric acid in three reactors. The temperature of the slurry in the reaction system is controlled by flash cooler system which removes excess heat of reaction and dilution. Slurry, from the flash coolers is fed to the filter and treated counter currently. The acid collected from the first filterate is a product acid on 43% P2O5. About 5% of P2O5 fed in the rock is co-precipitated in the hemi-hydrate. The purpose of next stage is, therefore, to recover this by transforming hemi-hydrate to di-hydrate. Hemi-hydrate cake is discharged to transformation tank and it is converted into dry di-hydrate by the adoption of the H2SO4 at a temperature of 70 centigrade. The di-hydrate cake undergoes two washings before it is discharged to gypsum slurry tank. Product acid of 43% P2O5 from the Hemi-hydrate filter is further concentrated to obtain 54% P2O5 in the concentration section. Finally 54% acid is stored in storage tanks. 43% P2O5 acid is an intermediate product formed in the reaction and it is sent to concentration section for recovery of 54% of ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the case of the assessee-appellants is that: (a) Employment of duty paid copper concentrate in the smelter is for the manufacture of dutiable copper anodes during which process sulphur-di-oxide emerges as a non-excisable by-product. (b) The duty paid copper concentrate is exhausted fully in the manufacture of dutiable copper anodes and sulphur-di-oxide emerges only as a by-product which is conceded at every point by the Department and once it is conceded that sulphur-di-oxide gas is a by-product there is no option for the Revenue except to classify the same under Rule 57D and not under Rule 6 of the Cenvat Rules. (c) Copper concentrate is nowhere employed for manufacture of sulphuric acid or phosphoric acid in the sulphuric acid plant or phosphoric acid plant. (d) The role of the copper concentrate as an input ends in the smelter after the finished products viz. copper anode and non-excisable by-product viz. sulphur-di-oxide emerge. 25. On the other hand, the case of the department is summed up as under : But for the use of copper concentrate, as basic input, the emergence of sulphur-di-oxide would not have been possible and without sulphur-di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of duty not to be denied or varied in certain circumstances - (1) Credit of specified duty shall not be denied or varied on the ground that part of the inputs is contained in any waste, refuse, or by-product arising during the manufacture of the final product, or that the inputs have become waste during the course of manufacture of the final product, whether or not such waste or refuse or by-product is exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty or is not specified as a final product under Rule 57A. (2) Credit of specified duty shall also not be denied or varied in case any intermediate products have come into existence during the course of manufacture of final products or the inputs are used in the manufacture of capital goods as defined in Rule 57Q and such intermediate products or capital goods are not chargeable to duty of excise. Rule 57AD of the Central Excise (Second Amendment) Rules, 2000 reads as under : Obligation of manufacturer of dutiable and exempted goods - (1) Cenvat credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is raised to about 400 C, equilibrium is reached more rapidly, but with reduced yield due to a shift in equilibrium to the left with increasing . 27. From the definition it would be seen that the definition speaks about the characteristics of Oxides of sulphur and also as to how sulphur-di-oxide is produced. This is therefore, not relevant to the issues that arose for determination by the Tribunal. 28. Having considered the rival contentions supported by the various case laws the following issues arise for our determination: (1) What is the final product that emerged during the process of manufacture of copper concentrate and was it cleared on payment of duty? (2) What are the by-product emerged in the process of manufacture of copper anode? (3) Whether a product manufactured by using the by-product/waste can be called as a final product or by-product? (4) Whether copper concentrate could be called as a common input for the manufacture of dutiable copper anodes and the by-products, such as sulphuric acid and phosphoric acid? (5) Whether provisions of Rule 57D applies to the facts of the present case? (6) Whether provisions of Rule 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al product. In terms of sub rule (2) of the same rule, even if intermediate product coming into existence during the course of manufacture of the final product, is not chargeable to duty, credit of specified duty cannot be denied or varied. In the present case, even the by-product/intermediate product, has been cleared on payment of duty at 16% and only a minor portion of the by-product/intermediate product has been cleared as exempted goods under Chapter X Procedure. We are therefore of the opinion that the provisions of Rule 57D are applicable to the present case. (6) As regards the sixth and last issue, both sides have conceded that Rule 57AD and Rule 57CC are worded on similar lines. We are of the considered opinion that the right to avail of the benefit under Rule 57D has not been taken away with the introduction of Rule 57 AD/Rule 57CC. 30. As noted above, in the present case, the final product manufactured by the assessee is copper anode which is cleared on payment of duty only and no part of copper anode is exempted. Sulphuric acid is a by-product manufactured out of the waste emerging during manufacture of the final product viz. copper anode. Phosphoric acid is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduct is irrelevant. It was further held by the Tribunal that in terms of Section 2(f), and Section 3 of the CEA, marketable goods are liable to duty if not exempt from duty. It was also held that adjustment of credit under Rule 5CC (1) of CER is not a duty and has no relation to value, under Section 4 of CEA or credit taken on them. This decision squarely applies to the facts of the present case because it is held that credit is permissible under Rule 57D(2) on inputs contained in by-products even if final product is exempted. Further in the case of CCE, New Delhi v. Indichem Chemicals Manufacturing Company Pvt. Ltd., reported in 1996 (87) E.L.T. 127 it was held that Modvat credit is not to be disallowed due to emergence of a by-product. It was also held therein that since credit of duty on sulphuric acid was lawfully available and taken by the respondents, the question of denial of credit or recovery of the amount utilised out of this credit is not sustainable simply because spent sulphuric acid is generated as a by-product in the process of manufacture of acid. This case laws is applicable to the present case going by the ratio that Modvat credit cannot be denied because of emer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the following reasons: The Board circular is dated 28-1-2002 whereas the decision in the case of Aarti Drugs was rendered as early as 18-4-2001. Board circular has not been taken into consideration the prevailing judicial ruling on the subject and the clarification is not based on any Court rulings. 31. It is well settled that Circulars of Board cannot be relied upon and are not maintainable if the same are contrary to judicial decisions and precedence. The Hon ble Madras High Court in the case of Pioneer Miyagi Chemicals v. CBEC, 2000 (116) E.L.T. 441 (Mad.) has held that Circulars issued by the Board which runs counter to judicial pronouncements are not valid and sustainable. The Hon ble Delhi High Court of Delhi in the case of Kissan Chemicals v. Union of India, 1996 (88) E.L.T. 648 has held that Circular under Section 327B cannot be issued contrary to the decision of the Tribunal. The Tribunal in the case of CCE v. Bata India Limited, 2001 (138) E.L.T. 335 (Tri.-Kolkata) have held that quasi judicial authorities are to decide matters independently and are statutorily protected from such instructions and can follow judgments of appellate forum instead of following such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the end-product and must be deemed to have been used in completion or manufacture of the end-product. It was also held by the Hon ble Apex Court that so long as it can be shown that the material used as inputs have a nexus with the process which is integrally connected with the ultimate production of goods till the same are fit for being put in the marketing stream and such process is so integrally connected with ultimate production of goods that it would be commercially inexpedient to produce the finished goods without that process, all such inputs would get the benefit of credit of duty. In this case the Hon ble Apex Court was interpreting the meaning of the term component parts and raw materials . The ratio laid down in this case law is not applicable to the present case inasmuch as in the present case the end product was copper anode and not only the dominant character of the input copper concentrate has been lost with the manufacturer of the final product copper anode but also its identity itself has been lost at that stage. (3) Indian Iron Steel Co. Ltd. v. CCE, Bolpur reported in 2002 (141) E.L.T. 695. In Terms of this judgment, the question whether the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instant case is not whether sulphuric acid and phosphoric acid are goods or not. (7) AP State Electricity Board v. CCE, Hyderabad. In this case what the Hon ble Supreme Court has held was that So long as goods were marketable, they are goods for the purpose of Section 3. It is not also necessary that the goods in question should be generally available in the market......The marketability of the article does not depend upon the number of purchaser nor is the market confined to the territorial limits of the this country . This case has no relevance to the present case, as the ratio laid down relates to the interpretation of the term goods . (8) CCE v. Kohinoor Mills reported in 1995 (77) E.L.T. 42 (S.C.). In this case, the Hon ble Supreme Court has held that if a manufactured item covered by the charge of excise duty is captively consumed, it would amount to removal of such manufactured item. Consequently, once the yarn is manufactured in the weaving department of the composite textile mill and taken to the spinning department for being captively utilised by way of consumption in the spinning department, and gets consumed, it is deemed to have been removed within ..... X X X X Extracts X X X X X X X X Extracts X X X X
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