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2018 (2) TMI 819

Modvat Credit - Manufacture of Steam - Whether STEAM should not be treated as final product when it is not only manufactured through a conscious activity undertaken by the respondents but also requires several well defined steps to manufacture it? - Held that: - there is no dispute as to the process adopted by the assessee to manufacture Carbon Black from CBFS or even as to the generation of 'steam' - admittedly only "lean gases" or "off gases" were released in the manufacture of Carbon Black from CBFS by way of technological necessity. These gases contained Carbon Monoxide. Upon burning Carbon Monoxide content in 'off gases' / 'lean gases' to render that 'waste' or 'refuse' or 'by-product' fit for release in the atmosphere, heat was obtained. Further, it was heat and not "off gases" or "lean gases" thus produced that was used to produce 'steam' - 'steam' is a final product. - Whether the benefit of Rule 57-D (1) of the erstwhile Central Excise Rules, 1944 should be extended to STEAM by treating it as a by-product or whether the restriction envisaged under Rule 57-C should be applied for availing credit on inputs used in or in relation to the manufacture of STEAM by treating it .....

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gases' were a by-product obtained in the manufacture of Carbon Black from Carbon Black Feed Stock (CBFS in short). The Tribunal had relied upon Rule 57D(1) of the Central Excise Rules, 1944 (hereinafter referred to as the Rules) and held that credit shall not be denied to the assessee on any part of the input i.e. CBFS by attributing its utilization in manufacture of 'steam' cleared at nil rate of duty. The assessee manufactured Carbon Black, that are goods classifiable under Chapter 28 of the First Schedule to the Central Excise Tariff Act, 1985 (hereinafter referred to as the Tariff Act), using CBFS as raw material/input. In that process, RFO/LSHS/LDO/FO was used as fuel. The assessee, subjected CBFS to process known as thermal cracking. It resulted in production of Carbon Black in particle form. However, in this process, 'off gases' also known as 'lean gases' emerged by way of technological necessity. Basically, those gases were crude hydrocarbon gases having high content of Carbon Monoxide. According to the assessee Carbon Monoxide being a hazardous gas, it could not be released freely into the atmosphere. Therefore, the assessee burnt the Carbon Mon .....

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ed was to be disallowed. Thus, essentially the Tribunal has reasoned that duty paid CBFS on which the input credit had arisen got consumed in the manufacture of Carbon Black. At the end of that manufacturing process, the assessee obtained 'off gases' / 'lean gases' as a 'by-product'. According to the reasoning of the Tribunal, the manufacturing process was complete at that stage with the manufacture of Carbon Black. 'Off gases' / 'lean gases' were generated as a 'by-product'. The application of Rules 57C and 57CC was examined by the Tribunal in the context of the aforesaid manufacturing activity alone. According to the Tribunal the applicability of Rules 57C and 57CC did not arise as 'off gases' / 'lean gases' were a 'by-product' that emerged in the manufacture of Carbon Black. The fact that 'off gases' / 'lean gases' were thereafter used in the manufacture of product i.e. 'steam' (that was exempt from payment of excise duty), did not amount to use of modvatable input (i.e. CBFS) to manufacture such 'steam'. Therefore, the assessee was held entitled to benefit of Rule 57 D of the .....

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ereby declared that the provisions of this rule shall apply notwithstanding the fact that the inputs on which credit has been taken are not actually used or contained in the products referred to in this rule." 57D. Credit 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 allowed in respect of any inputs shall not be denied or varied on the ground that any intermediate products have come into existence during the course of manufacture of final products or such inputs are used in the manufacture of capital goods as defined in Rule 57 Q and that such intermediate products or capital goods, as the case may be, are for the time being exempt from the whole of .....

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ittedly been obtained from duty paid CBFS. Also, because 'steam' was a final product and the assessee cleared it without payment of duty, therefore it became liable to proportionate reversal of input credit on CBFS utilised to manufacture 'steam'. Responding to the aforesaid submissions, Sri Badri Lakshmikumaran and Sri Nishant Mishra, learned counsel for the assessee submit that the assessee had established it's unit to manufacture only Carbon Black from CBFS and not to manufacture 'steam'. It had subjected the entire quantity of CBFS to thermal cracking process only to manufacture Carbon Black. No quantity of CBFS survived the thermal cracking process nor could it be identified as CBFS available for use to manufacture 'steam'. Also, 'steam' did not emerge upon production of Carbon Black or as part of that process of manufacture of Carbon Black. Therefore, it has been first submitted that the applicability of the Rules 57C or 57CC had to be examined at this stage only. What followed thereafter was disconnected with the first part of activity conducted by the assessee and therefore it could not be looked into. The second part of the asses .....

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of heat and that neither steam nor heat was produced in the manufacture of Carbon Black. In fact, admittedly only "lean gases" or "off gases" were released in the manufacture of Carbon Black from CBFS by way of technological necessity. These gases contained Carbon Monoxide. Upon burning Carbon Monoxide content in 'off gases' / 'lean gases' to render that 'waste' or 'refuse' or 'by-product' fit for release in the atmosphere, heat was obtained. Further, it was heat and not "off gases" or "lean gases" thus produced that was used to produce 'steam'. Clearly, 'steam' is a final product. Question no. 1 is answered accordingly. As noted above, the entire process beginning from thermal cracking of CBFS to generation of steam as has been found to have been adopted by the assessee was in two parts. In the first part, the assessee subjected CBFS to process of thermal cracking. It only produced Carbon Black in particle form and 'off gases'/'lean gases'. The entire quantity of CBFS on which input credit had been availed was subjected to thermal cracking and no part of CBFS remained un .....

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was exempt from payment of duty. However, it remains to be seen whether it was a final product obtained from duty paid input. As to the scheme of the Rules, upon a co-joint reading of Rule 57C and Rule 57CC and Rule 57D it thus emerges that full input credit is to be availed by the assessee in cases covered under Rule 57D that is where the 'waste', 'refuse', 'by-product' or 'intermediate product' emerges but at the same time is chargeable to nil rate of duty or is exempt from payment of duty. In the instant case, the Tribunal has correctly examined the issue on facts and thereafter found that 'off gases'/'lean gases' were the 'by-product' in the manufacture of Carbon Black by subjecting CBFS to thermal process. No challenge having been raised in the present appeal to the aforesaid finding of the Tribunal that 'off gases'/'lean gases' were a 'by-product' obtained in the manufacturing of Carbon Black from CBFS, there is no room or basis to apply either Rule 57C or Rule 57CC of the Rules in view of such finding of fact recorded by the Tribunal. Then, it is seen assessee engaged a boiler plant to burn Carb .....

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ntroversy. In that case that assessee had engaged in the manufacture of Gelatin from animal bones of bovine animals. In that process the assessee treated animal bone containing both organic material (protein) as also inorganic material phosphorus with hydrochloric acid. Upon such process the organic substance namely protein being insoluble in water resulted in 'Ossien' while inorganic substance being water soluble, formed the "mother liquor/phosphoryl liquor". Insoluble 'Ossien' was further processed to manufacture Gelatin which was cleared on payment of excise duty while inorganic substance/'mother liquor' being waste liquid was to be thrown away. 'Mother liquor' being hazardous to environment, (like 'lean gases'/'off gases' in the instant case), the Pollution Control Board had required it to be treated before it's discharge. Accordingly, the assessee in that case set up a separate plant and use the 'mother liquor' to manufacture Phosphoryl A-Phosphoryl B that were exciseable goods under falling Chapter Heading 23.02 of the Central Excise Tariff Act, but which at that time were wholly exempt from payment of duty .....

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ct Rule 57CC, because, if Rule 57 CC was not applicable at the time of clearance of the waste mother liquor arising in the manufacture of dutiable gelatin, then the said rule cannot be applied merely because mother liquor was further processed to manufacture exempted final product, namely phosphoryl 'A' & 'B'. In other words, liability to pay the presumptive amount under Rule 57CC would arise only if the waste mother liquor is held to be a final product. It is not even the case of the revenue that the waste mother liquor arising in the manufacture of gelatin is a final product. Therefore, in the facts of the present case, if Rule 57CC was not applicable at the time of clearance of waste mother liquor, then Rule 57CC would not apply at the time of clearance of the exempt phosphoryl 'A' & 'B' manufactured out of waste mother liquor." Then, Bombay High Court further held as below:- "31. The Larger Bench of the Tribunal has held that Rule 57D referred to waste, scrap and by-products which are not exerciseable at all. In this connection, the Larger Bench has referred to the instances of the floor sweepings arising in the manufacture of b .....

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acture of gelatin, then the said Rule cannot be made applicable merely because the said waste mother liquor was utilized in the manufacture of exempted final product viz. phosphoryl 'A' and 'B'." Then, in the case of Union of India Vs. Hindustan Zinc Ltd. reported in 2014 (303) E.L.T. 321 (S.C.), the Supreme Court specifically affirmed the judgment of the Bombay High Court in the case of Rallis India Ltd. Vs. Union of India(supra). The Supreme Court held as below:- "25. These arguments may seem to be attractive. However, having regard to the processes involved, which is already explained above and the reasons afforded by us, we express our inability to be persuaded by these submissions. We have already noticed above that in the case of Birla Copper (C.A. No. 2347 of 2011) the Tribunal has decided the matter following the judgment in the case of Swadeshi Ltd. (supra). In that case, Ethylene Glycol was reacted with DMT to produce polyester and Ethanol. Methanol was not exciseable while polyester fibre was liable to excise duty. Credit was taken of duty paid on ethylene glycol wholly for the payment of duty on polyester. The department took a position that et .....

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