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CCE, Allahabad Versus M/s. Hi- Tech Carbon

2018 (2) TMI 819 - ALLAHABAD HIGH COURT

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 fr .....

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AM 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 as a final product as STEAM is exempted from duty? - Whether for denial of credit under Rule 57-C of the erstwhile Central Excise Rules, 1944 the inputs must be directly linked to the final product? - Held that: - upon a co-joint reading of Rule 57C and Rule 57CC and Rule 57D it thus emerges that f .....

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e present case despite the fact that steam was a final product - decided in favor of assessee. - Reference allowed. - Central Excise Reference No. 3 of 2012 - Dated:- 30-11-2017 - Hon'ble Bharati Sapru And Hon'ble Saumitra Dayal Singh, JJ. For Applicant : C.S.C.,Parv Agarwal For Opposite Party : Nishant Misra,R.P. Agrawal ORDER ( Per S.D. Singh ) This reference has been made under Section 35(H) of the Central Excise Act, 1994. It arises from the order of the Customs, Excise Service T .....

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ral 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 as a final product as STEAM is exempted from duty? (iii) Whether for denial of credit under Rule 57-C of the erstwhile Central Excise Rules, 1944 the inputs must be directly linked to the final product?" The Tribunal by its final order dated 7.3. .....

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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 .....

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e put to use, which the assessee did by generating 'steam' from de-mineralised raw water treated with caustic soda and hydrochloric acid, by employing a boiler. The 'steam' so generated were then used, in part, to pre-heat CBFS (subjected to thermal cracking process to manufacture Carbon Black). The remaining quantities of 'steam' were sold to M/s Hindalco Industries Ltd., Renukoot, at nil rate of duty. According to the Tribunal, in the above described second part of the .....

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en generated by the appellants as a conscious act but it cannot be claimed by the Revenue that any part of the inputs, that is CBFS or any other inputs which has gone into the manufacture of Carbon Black has been used in the manufacture of steam. For the purpose of applying the provisions of Rule 57 (C) or 57 CC, it is the pre-requisite that the inputs are used in the manufacture of products which are exempted from the whole of the duty of excise or is chargeable to nil rate of duty. The mere fa .....

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es there was no intention to deprive the assessee of benefit available under Rule 57D(1) of the Rules to a 'by-product', 'waste' or 'refuse'. Thus no part of input credit availed 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-produ .....

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roduct' 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 Rules despite insertion of Rule 57CC to the Rules. At this stage, it would be useful to take note o .....

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ogy Parks] [ or supplies to the United Nations or an international organisation for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 108/95-Central Excise, dated the 28th August, 1995] shall be allowed if the final product is exempt from the whole of the duty of excise leviable thereof or is chargeable to nil rate of duty. Rule [57CC. Adjustment o .....

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em, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 108/95-Central Excises, dated the 28th August, 1995 which is exempt from the whole of the duty of excise leviable thereon or is chargeable to nil rate of duty, the manufacturer shall pay an amount equivalent to twenty per cent of that value of such product at the time of clearance of the said product by adjustment in the credit account maintained under .....

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is 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 char .....

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the duty of excise leviable thereon or chargeable to 'nil' rate of duty: Provided that such intermediate products are used within the factory of production in the manufacture of a final product (other than those cleared either to a unit in a free trade zone, or to a hundred percent Export Oriented Unit or to a unit in an Electronic Hardware Technology Park or to a unit in Software Technology Park) or supplied to the United Nations or an international organization for their official use o .....

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n respect of inputs which are used for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production." (emphasis supplied) Sri Parv Agarwal, learned counsel for the revenue has first relied on the declaration made by the assessee under Rule 173B(1) of the Rules to submit that the assessee had of it's own declared 'steam' as other goods (final product) produced/manufactured and intended to be removed. Therefor .....

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ted as not the final product, yet, 'steam' being 'any product' manufactured by the use of duty paid CBFS, the assessee could not have claimed input credit on the CBFS proportionate to the quantity of CBFS utilised in the manufacture of such 'steam'. He further submits, the assessee obtained 'steam' from 'off gases' / 'lean gases' that in turn had admittedly been obtained from duty paid CBFS. Also, because 'steam' was a final product and the .....

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ly 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 activi .....

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ted 'off gases' / 'lean gases'. This was a legal compulsion which the assessee was obliged to discharge. Therefore, the harmful Carbon Monoxide contained in 'off gases' / 'lean gases' had to be burnt. Such burning of 'off gases' / 'lean gases' generated heat. It was heat that was utilised by the assessee to run it's boilers with cured / treated water to generate 'steam'. Thus, it has been submitted, no part of CBFS was ever utilised to .....

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ed counsel for the assessee on the judgments of the Bombay High Court in the case of Rallis India Ltd. Vs. Union of India reported in 2009 (233) E.L.T. 301 (Bom.) as affirmed by the Supreme Court in the case of Union of India Vs. Hindustan Zinc Ltd. reported in 2014 (303) E.L.T. 321 (S.C.). Having considered the arguments so advanced by learned counsel for the parties, we find there is no dispute as to the process adopted by the assessee to manufacture Carbon Black from CBFS or even as to the ge .....

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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 obt .....

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lack 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 unused or unutilized at the end of that process. Thus, upon completion of the first part of the process the assessee had available with it, on one hand Carbon Black that was admittedly a final product and also a dutiable item. On the other hand, certain gases that were not intended to be manufactured .....

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tent of Carbon Monoxide), they could not be freely released into the atmosphere. The assessee burnt the Carbon Monoxide present in 'off gases' / 'lean gases' before releasing the same in the atmosphere. The language of Rules 57C and 57CC of the Rules is clear. Those Rules would operate to disallow input credit to a manufacturer in specified situations involving manufacture of goods in which duty paid input had been used to manufacture goods that were either exempt from duty payme .....

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a 'product' is either exempt from the whole of duty of excise or is chargeable to nil rate of duty. Thus, two things must be established before a disallowance of input credit may be made under Rules 57C or 57CC. First, 'use' of the duty paid input 'in the manufacture of' a 'final product' or 'any product' as the case may, must be established. Then such 'final product' or 'other product' must itself either be exempt from payment of excise d .....

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r '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'/&# .....

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erated was partially captively utilized as also partially cleared to M/s Hindalco Industries Ltd., Renukoot. The 'off gases'/'lean gases' itself arose because of technological necessity, upon CBFS being subjected to thermal cracking process to produce Carbon Black. However, for that process to be complete there was no requirement to burn 'off gases'/'lean gases'. The process to manufacture Carbon Black was complete before the 'off gases'/'lean gases .....

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rnt to produce the heat that in turn was used to generate 'steam' from water. Therefore, it would be too far fetched and fanciful to reason that 'steam' was generated by using CBFS as an input when (i) no part of CBFS was burnt to generate 'steam'; (ii) the entire quantity of CBFS was subjected to thermal cracking to produce Carbon Black only; (iii) the process of thermal cracking of CBFS did not result in generation of steam but only in the manufacture of Carbon Black as .....

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f which is either exempt from duty payment or is cleared at nil rate of duty. We also find that Bombay High Court in the case of Rallis India Ltd. Vs. Union of India(supra) had dealt with a similar controversy. 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 .....

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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. In the aforesaid factual background, the revenue proceeded to disallow 8% of input credit credit o .....

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d in the manufacture of dutiable final product. Where a manufacturer uses common inputs to manufacture both dutiable final product as well as exempted final product, then such manufacturer is required to reverse the credit to the extent the input is used in the manufacture of the exempted final product. Where separate account was not maintained or could not be maintained so as to ascertain the quantity of inputs used in the manufacture of exempted final product, there used to be difficulty in re .....

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sing in the manufacture of gelatin is admittedly a waste on which no excise duty is payable. In spite of the fact that no excise duty is payable on the clearance of waste mother liquor, in view of Rule 57D, the petitioner is entitled to avail entire credit of duty paid on HCL, which is used as input in the manufacture of gelatin. In other words, in the present case, the petitioner is not required to reverse the credit of duty on HCL at the time of clearance of the waste mother liquor and consequ .....

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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 cle .....

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iscuits, waste and scraps arising in the manufacture of iron products and hydrogen arising as a by-product in the manufacture of oxygen by the process of electrolysis of water. We find it difficult to accept the above finding. What Rule 57D provides is that where modvated input is used in the manufacture of dutiable final product and waste, refuse or by-product arise in that process, then, even if the modvated inputs are contained in the waste, refuse or by-product and whether or not excise duty .....

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/hydrogen arising in the manufacture of biscuits/iron products/oxygen, respectively would be governed by Rule 57CC if they are exempted final products and would be governed by Rule 57D if they are merely waste, refuse of by-product arising in the manufacture of dutiable final product. In the present case, mother liquor arising in the manufacture of dutiable gelatin, is not an exempted final product and, therefore, the petitioner was not liable to reverse any credit of duty availed on input or al .....

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n the present case, mother liquor arising in the manufacture of dutiable gelatin is a waste and not an exempted final product. Therefore, in the light of Rule 57-D the petitioner was entitled to the entire credit availed and there was no obligation to reverse credit or pay presumptive amount under Rule 57CC was not applicable at the time of clearance of the waste mother liquor arising in the manufacture of gelatin, then the said Rule cannot be made applicable merely because the said waste mother .....

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