TMI Blog2008 (11) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... ng under heading 3503.00. They are using hydrochloric acid as an input and availing cenvat credit of duty paid on hydrochloric acid as an input. (b) The process of manufacture of gelatine, as submitted by the Ld. advocate, is as follows :- The appellant uses crushed animal bones as the basic raw material which contains organic material namely 'ossein' which is protein and inorganic substances like phosphorous and calcium. The animal bones are subjected to 'acidulation' with hydrochloric acid (5% concentration) to remove the minerals namely calcium and phosphorous. The process of acidulation which is basically a process of 'demineralisation' lasts for several days and results in emergence of two products namely 'ossein' and 'mother liquor'. The product 'ossein' is further processed to produce gelatine. The other product 'mother liquor' is also known as spent liquor or phosphoryl liquor and the same consists of mono calcium phosphate and spent acid (about 0.5% concentration). It is hazardous in nature in this form. It was being thrown away as waste till 1981. Because of Pollution Control requirements, they were required to treat this hazardous material. Accordingly, the mother li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossible to maintain separate accounts for hydrochloric acid attributable to the manufacture of the exempted products. 4.4 The entire hydrochloric acid is used only at the initial stages for the acidulation purpose; it is not possible to use lesser quantity of hydrochloric acid to obtain the same quantity of gelatine. Therefore, it should be held that entire inputs have been used for dutiable products namely gelatine. 4.5 He relies on the decision in the case of Swadeshi Polytex Ltd. v. CCE reported in 1989 (44) E.L.T. 794 (S.C.) wherein it has been held that the entire inputs, ethylene glycol, has been held to have been used in the manufacture of polyester fiber even though non-dutiable methanol emerged as a by-product. The said decision was interpreting the applicability of Notification No. 201/79-C.E., dated 4-6-79 prior to amendment of the said notification from 11-4-81. The Hon'ble Supreme Court has held that even prior to the amendment the only situation where the credit of duty paid on the inputs to be denied was only where the final products were wholly exempt from the duty of excise were chargeable to Nil rate of duty. 4.6 He also submits that the DCP and ED ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cid is used on which cenvat credit is availed by the assessee. During the process of manufacture of gelatine, products viz. DCP EDCP falling under chapter heading 2302.00 of the tariff, are also obtained which are exempted from payment of duty.... 13. From the above, it is observed that the Hydrochloric Acid was used by the assessee at the very initial stage of manufacture i.e.. during demineralisation of crushed bones. After acidulation, the bones were converted into Ossein, an intermediate product, which was then used for the manufacture of Gelatine, their final product. During acidulation process, besides Ossein, one more product namely Mono-Calcium Phosphate (MCP) was also obtained in the form of spent acid/mother liquor. Ossein is organic in nature which after further processing gives rise to gelatine whereas MCP is inorganic in nature which by further processing gives rise to DCP. Hydrochloric acid was used by the assessee to remove calcium and phosphorus present in bones in the form of MCP. Thus, the use of hydrochloric acid in the manufacture of MCP is confirmed. MCP, the mother liquor obtained during acidulation could not be drained out as such being a pollution hazard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e quantity of gelatine. 7.3 At the same time, the submission that no hydrochloric acid is used in the manufacture of exempted products is not entirely correct. It is to be noted that the process of demineralisation led to emergence of two intermediate products namely ossein and mother liquor and the exempted products emerged on further processing of the mother liquor. In that sense, the entire amount of hydrochloric acid has also been used in relation to manufacture of both the exempted products. However, no hydrochloric acid is added as input while processing the mother liquor. No part of the hydrochloric acid or any of its elements is part of the exempted by-products. 7.4 Separation of quantity of HCL meant for exempted products and dutiable products is not possible inasmuch as the entire quantity has been used at the earlier stage which is a common stage for both the products to finally emerge. When segregation is not possible, the question of maintaining separate accounts for such segregated quantities does not arise. It cannot be denied that the appellant has not used the entire hydrochloric acid in relation to manufacture of final dutiable products. 7.5 It is cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the emergence of a by-product as a part and parcel of chemical reaction cannot lead to denial of the concession. 9. In view of the above, we hold that the entire hydrochloric acid stands used in the composite process at the initial stage and therefore, it cannot be denied that the entire quantity is used in relation to the manufacture of the dutiable products; it is not possible to use lesser quantity of hydrochloric acid to obtain the same quantity of gelatine; the product DCP, EDCP which arise out of treatment of mother liquor as per the Pollution Control Regulations has to be treated as by-products; no amount of hydrochloric acid has been exclusively used in the manufacture of exempted products; the exempted by-products do not contain any part of hydrochloric acid as an input; hydrochloric acid as an input was eligible for credit; and that maintenance of separate account is neither feasible nor warranted. The ratio of Swadeshi Polytex Ltd., is squarely applicable to the facts of the present case. 10. The appeal is allowed with consequential relief. 11. [Order per: D.N. Panda, Member (J)]. - While concurring with my learned brother on the decision and result of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id. Both the appeals reached to finality without further agitation by either side before higher forum. 14. It was noticed that the self-same Assessing Authority who passed the impugned order, in a similar issue relating to common use of the input for manufacture of dutiable and exempted final products for the period from May, 1998 to September, 1998, July 1999 to August, 1999, September 1999 to October, 1999 to March, 2000 initiated by show cause notices dated 2-12-1998, 20-12-1999, 1-3-2000, 28-3-2001 (sic) and 24-3-2001, by order dated 30-9-2004 applied the ratio laid down by the learned Commissioner (Appeals) as aforesaid and dropped the proceeding against the Appellant. In the above order dropping the proceeding learned adjudicating Authority in Para-13 at page of the order (available at page 99 of the paper book) held as under : "The role of Hydrochloric acid was complete with the treatment of crushed bones with it during acidulation and the Hydrochloric acid was exhausted during treatment of crushed bones" (emphasis supplied). In Para 16 of the above order it was also held that in the process of conversion of Mono Calcium Phosphate (MCP) to DCP/EDCP no inputs were use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of hearing. However, reference memo appearing on the reverse side of that report exhibited that sample of 100 ml mother liquor (containing MCP) was drawn on 22-9-1986 and that was sent for testing on 22-9-1986. The requirement for testing was to ascertain the percentage of MCP (Mono Calcium Phosphate) in the sample. But thereafter no reference was made by Revenue to a recognized laboratory to find out whether the MCP which comes out while Ossein was manufactured contains HCl (Hydrochloric Acid). Such essential fact suggests that Revenue was not curious to know whether Modvatable/ Cenvatable input was contained in the MCP which at a subsequent stage gives rise to DCP and EDCP and those are exempted final products. Nor also the Department had witnessed any trial production to ascertain by technical study or by any objective analysis whether modvatable input was in composition with MCP. In absence of clear proof, no adverse inference is possible to be drawn against the Appellant, but benefit of doubt goes in favour of Assessee since Revenue failed to discharge its burden of proof when a charge is levied by it. The Appellant is also entitled to benefit of doubt for the reason that enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to, the manufacturer of such exempted final product, at the time of their clearance from the factory. Under clause (b) of sub-rule (3) the manufacturer opting for non-maintenance of accounts for making claim under sub-rule 6(1) of Rule 6 and not manufacturing goods prescribed by Clause (a) of rule 6(3) shall be required to pay an amount equal to 8% of the total sale price of the exempted final product (excluding sales tax and other taxes, if any on such goods) at the time of clearance from the factory. The levy of 8% is in respect of exempted final products but not on anything else that emerge while manufacturing dutiable goods using cenvatable input in the process of such integrated manufacture. 19. The term "final product" is defined by Rule 2(e) of Cenvat Credit Rules, 2002. That states that "final products" means excisable goods manufactured or produced from inputs, except matches. The term "exempted goods" is defined by Rule 2(d) which states that "exempted goods" means goods which are exempt from the whole of the duty of excise leviable thereon, and includes goods which are chargeable to "NIL" rate of duty. The term "input" is defined by Rule 2(g) of Cenvat Credit Rules, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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