Archana Wadhwa, Member (J)

1. The issue referred to the Larger Bench is as under:

Whether 8% of the amount as per erstwhile Rule 57CC of Central Excise Rules, 1944 (now Rule 6 of Cenvat Credit Rules, 2002) is required to be discharged, before removal of by products/subsidiary products when such products are exempted from whole of duty, therein in light of the conflicting view in the above two decisions.

The above issue came to be referred to the Larger Bench by noticing two streams of views regarding interpretation of the provisions of Rule 57CC by different precedent decisions of the Bench.

2. Before we proceed to decide the issue it is worth referring to the manufacturing process of the appellant, who are engaged in the manufacture of gelatin. For the said purpose the initial raw material is animal bones and hydrochloric acid. The appellants were availing benefit of modvat credit in respect of HCL. The animal bones were treated with HCL. As a result inorganic material in the animal bones react with the HCL to form water-soluble compound. This inorganic material in the form of water-soluble compound are removed from the process undertaken by the Appellant to manufacture Gelatin. The water soluble compound so removed from the manufacturing process is called Phosphoryl Liquor/Mother Liquor. The other material which remained in the process i.e. Organic material is known as Ossien and further processed to manufacture Gelatin falling under Chapter 35 Heading 3503 of the Central Excise Tariff Act, 1985. Phosphoryl Liquor/Mother Liquor removed from the process undertaken to manufacture Gelatin is a hazardous chemical waste. This Phosphoryl liquor i.e. waste obtained in the process of manufacturing Gelatin is processed by the Appellant with lime to form Dye-Calcium Phosphate (also known as Calphor). This Calphor is further processed to obtain Phosphoryl A and Phosphoryl B which are classifiable under Heading 2302 of the Central Excise Tariff Act, 1985 attracting nil rate of Central Excise Duty.

3. The modvat credit availed by the appellant on HCL was being used by them for discharge of duty leviable on Gelatin. However, Revenue was of the view that inasmuch as, the said HCL is being used for manufacture of gelatin as also for manufacture of phosphoryl, which is an exempted product, the appellants are liable to reverse an amount of 8% of the value of the said exempted goods. Accordingly, proceedings were initiated by way of issuance of different show cause notices, which culminated into the impugned order passed by Commissioner of Central Excise confirming demands and imposing penalties. On hearing the appeal against above order, Referral Bench noticed conflicting views of the Tribunal and accordingly referred the matter to Larger Bench.

4. We have heard Shri V. Sridharan, Ld. Advocate appearing for the appellant and Shri Promod Kumar Ld. JDR appearing for the Revenue.

5. The appellants main contention is that the mother liquor, which is further used in the manufacture of Phosphoryl A and B (exempted products) is in the nature of a by product, and as such, the provisions of Rule 57CC or Rule 6 of Cenvat Credit Rules 2002, would not get attracted. The entire emphasis of the arguments advanced by Ld. Advocate Shri V. Sridharan was in support of the above plea.

6. Before dealing with the various arguments advanced, we would like to reproduce the relevant rules for the purposes of immediate reference.

MODVAT CREDIT RULES, (erstwhile)

Rule 57CC. Adjustment of credit on inputs used in exempted final products or maintenance of separate inventory and accounts of inputs by the manufacturer.-(1) Where a manufacturer is engaged in the manufacture of any final product which is chargeable to duty as well as in any other final product which is exempt from the whole of the duty of excise leviable there on or is chargeable to nil rate of duty and the manufacturer takes credit of the specified duty on any inputs (other than inputs used as fuel) which is used or ordinarily used in or in relation to the manufacture of both the aforesaid categories of final products whether directly or indirectly and whether contained in the said final products or not, the manufacturer shall, unless the provisions of Sub-rule (9) are complied with, pay an amount equal to eight percent of the price (excluding sales tax and other taxes, if any payable on such goods) of the second category of final products charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

CENVAT CREDIT RULES, 2000.

Rule 6. Where 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.

The appellants main contentions is that the said rule is applicable only when a particular input is used in the manufacture of final products which are chargeable to duty as well as exempted goods. It is the appellants case that the entire quantity of HCL is used in the manufacture of gelatin and emergence of mother liquor at that stage is incidental. Mother liquor is in the nature of a by product and hence cannot be considered to be a final product manufactured by the appellant. Our attention has already been drawn to the provisions of Rule 57C as also to Rule 57-D, which prescribe that no part of the input credit would be denied or varied on the ground that the part of the inputs is contained in waste or scrap arising during the course of manufacture of the final product. It has been contended that when Rule 57C is not applicable, provisions of Rule 57CC cannot be invoked against the appellant. Similarly, provisions of Rule 57CC cannot be interpreted in such a way so as to nullify Rule 57D, which is a shield given to the assessee and could not be transformed into a sword. Our attention has also been drawn to the definitions of the expression by-product and various other technical definitions have been referred to. Accordingly, Ld. Advocate has prayed that the decisions which are in favour of the appellant laying down that Rule 57CC will not apply to by products, should be concurred with.

7. As against the above Ld. DR appearing for the Revenue submits that Rule 57CC does not differentiate between the final products or by products. In any case Phosphoryl A & B which are being cleared from the appellants factory are not claimed to be by product and are admittedly final products which are exempted. HCL being the starting raw material, has to be considered as having been used in the manufacture of Phosphoryl A & B. As such, submits the Ld. DR that the provisions of Rule 57CC have been correctly applied. He has also drawn out attention to the Supreme Courts decision in the appellants own case wherein the appellants have themselves contended before the court that gelatin was not chemical but a biological product and can be obtained by boiling and pressuring, in which case it becomes clear that HCL has been used intentionally by the appellant so as to procure two different final products. Otherwise gelatin could have been obtained only by boiling and pressuring. Further, by referring to the various chemicals dictionaries, it has been strongly argued that the purpose of addition of HCL was to dissolve the mineral contents present in the bones i.e. phosphorus and to obtain the final products Phosphoryl A and B have been manufactured with the assistance of HCL.

8. After considering the submissions were made by both the sides, we find that the essential question required to be decided in the present appeal is as to whether HCL, on which the appellant has taken the credit, is used in the manufacture of Phosphoryl A and Phosphoryl B; that whether Phosphoryl A & B are final product; that whether mother liquor emerging in between is a by-product and whether the provisions of Rule 57CC would apply even if one of the two final products emerging is by-product. It is seen that the appellant in their own case before Supreme Court reported as Rallis India Ltd. v. State of Tamil Nadu (the case related to Sales Tax) had taken a stand that gelatin is a protein obtained from collagen which originates from the animal kingdom mainly from skin and bones under suitable pressure. The experts opinion placed on record by the appellant, in that case, are to the effect that gelatin is obtained by boiling skin, ligaments, tender bones etc. with water under pressure. It was the appellants case that gelatin has no chemical formula and, as such, would not come under the generic of chemicals. The above stand of the appellant was accepted by the Honble Supreme Court. As such, it is seen that even according to the appellant, HCL is not a necessary and fundamental input for the manufacture of gelatin, which can be obtained even without the use of the same. This leads to the evident position that HCL is used for extracting the inorganic part of the bones, which are further converted into Phosphoryl A & B. As such, it has to be held that HCL is used in the manufacture of Phosphoryl A & B irrespective of emergence of mother liquor in between.

9. The said Phosphoryl A & B are excisable products classifiable under Chapter 23 of the. It is not the appellants claim that the said products are by-product. Admittedly, the same are consciously manufactured products. They are arising regularly and continuously, along with the manufacture of gelatin and are being regularly sold by the appellant. Their emergence has to be treated as a result of intended manufacture and not as unwanted product. The Honble Supreme Courts in the case of Commissioner of Sales Tax Bombay v. Bharat Petroleum Corporation Ltd. has observed that where a subsidiary product is turned out regularly and continuously in the course of a manufacturing business and is also sold regularly from time to time, an intention can be attributed to the manufacturer to manufacture and sell not merely the main items manufactured but also the subsidiary products. As such, it has to be held that Phosphoryl "A & B are the intentionally manufactured products. Further, even the mother liquor which emerges during the course of processing of bones with HCL and further used in the manufacture of Phosphoryl A & B cannot be extended the benefit, as we have already observed that the entire process from start to end has to be examined, in which case undoubtedly HCL has to be held as having been used in the manufacture of Phosphoryl A & B.

10. As regards the issue as to whether the provisions of Rule 57CC would apply to an exempted by product or not. We find that the Referral Bench has taken note of the Tribunals decision in the case of Rama Industries Ltd. v. Commissioner of Central Excise, Chandigarh 2004 (178) ELT 720 (Tri.-Del) laying that there is no requirement to pay 8% of the selling price of the exempted by products under erstwhile Rule 57CC (identical to Rule 6 of Cenvat Credit Rules, 2002). The said decision stands subsequently followed by the Tribunal in the case of Narmada Gelatines Ltd. v. Commissioner of Central Excise, Bhopal . Further in the case of Aarti Drugs Ltd. v. Commissioner of Central Excise, Mumbai-III , it was held that inasmuch as, mother liquor emerging in process of manufacture of methyl nitro imidazole is by-product, provisions of Rule 57CC will not apply.

The ratio of the above decisions laying down that provisions of Rule 57CC are not applicable to by-product is primarily on the basis that prior to the enactment of the said Rules, modvat credit of duty paid on the inputs, contained in the by-product, was not liable to be reversed in terms of provisions of Rule 57-D. The Bench in the case of Aarti Drugs Ltd. observed that the object of Rule 57CC cannot be to eliminate the benefit available under Rule 57-D(1) to a by-product. Inasmuch as, the Rule 57-D continues un-amended on the statute, the provisions of Rule 57CC cannot be pressed into service.

11. As against the above, the other line of thought is contained in the Tribunal decision in the case of Indian Iron & Steel Co. Ltd. v. Commissioner of Central Excise, Bolpur and in the case of Binani Zinc Ltd. v. Commissioner of Central Excise, Cochin . The ratio of these two decisions is that the provisions of Rule 57CC are applicable irrespective of the nature of the final product i.e. whether intended final product or a by-product or a subsidiary product.

12. We have already reproduced Rule 57CC and Rule 6 in the previous paragraphs. As is clear from the reading of the said Rule the same applies to the final product, dutiable or exempted and makes no distinction between a intended final product or unintended emergence of by-product. The said rule in simple terms, requires the assessee to pay an amount equal to 8% of the value of the goods cleared at nil rate of duty, even where the inputs have been used directly or indirectly in the manufacture of such final product. As we have already held that HCL has been used in the manufacture of final product Phosphoryl A & B, which attract nil rate of duty, the provisions of Rule 57CC would apply. As observed by the Bench in the case of Indian Oil & Steel Co. Ltd. the expression used in Rule 57CC is--that inputs which are used in or in relation to manufacture of both the category of final product i.e. dutiable as well as exempted or attracting nil rate of duty. The expression "in or in relation to" has been interpreted by various decisions to be of wide connotation. It is impossible to obtain the mother liquor or the resultant Phosphoryl A & B, without the use of HCL. As long as it is held that HCL is used in the manufacture of Phosphoryl A & B, the applicability of provisions of Rule 57CC cannot be ruled out.

13. The appellants reference to the provisions of Rule 57D in support of their contention that modvat credit is not to be denied if a part of the same is contained in the by-product, is indicative of the legislative intent that reversal of 8% amount of the value of the by-product in terms of provisions of Rule 57CC will not apply. We find that the expression "by-product" occurring in Rule 57-D has to be examined and interpreted in the context of the said rule, which uses the other expression "waste" or "refuse" etc. It is in that scenario that the rule provides for non-reversal of modvat credit, even if waste, refuse or by product has emerged during the course of manufacture. The effect of the said rule would be that if waste product, which may not be excisable, e.g. floor sweepings during the course of manufacture of biscuits, then the quantum of credit originally taken is not to be varied. Similarly, if iron and steel scrap arises during manufacture of iron products, the modvat is not to be varied, but iron and scrap being excisable product, has to discharge duty burden. If the same is exempted, provisions of Rule 57CC will apply. As such, it has to be concluded that Rule 57-D refers to waste, scrap and by-product, which are not excisable at all. The said provision cant be pressed into service in support of the plea that even if the by-product is excisable, but exempted, amount of 8% is not required to be paid. The appellant is not being directed to reverse the credit amount equivalent to the inputs contained in the said exempted final products. Further, taking an hypothetical example of electrolysis of water, which an assessee may undertake to obtain Oxygen, can he take the plea that hydrogen which also emerges during such electrolysis was an unintended product and even if the same is being sold as exempted product, the same should be treated as by-product and Rule 57CC would not apply The answer to above question is a clear No.

14. The issue in the instant case is not relatable to reversal of the credit originally taken by the appellant on the ground of emergence of any by-product. The issue before us is a straight and simple interpretation of Rule 57CC, which as already held does not make any distinction between exempt final product or exempt by product. As along as the excisable product cleared from the assessees factory enjoys exemption or attracts nil rate of duty, provisions of Rule 57CC will come into play. The straight answer to the above question lies in the literal interpretation of the language employed in the said Rule without straining to find out the legislative intent, especially when the language used is unambiguous. As already observed, the provisions of Rule 57CC or Rule 6 envisage common use of inputs in two final products i.e. one dutiable and other exempted, for the applicability of the same. As such, we are of the view that as long as two final products emerging out of use of common inputs are excisable and one of them is exempted, the provisions of Rule 57CC will apply. The exempted final product may be intended manufacture or unintended by-product. As such, we agree with the view expressed in Binani Zinc Ltd. . Reference is answered in above terms. File is sent back to the regular bench for disposal of appeal.

(Pronounced in court on 13/12/06)