R. Periasami, Member (T)

1. The present appeal is in the second round of litigation where the Commissioner of Central Excise, Tirunelveli passed the de novo order dt. 31.1.20007.

2. The brief facts of the case are that appellants are the manufacturers of the final product Copper Anode and cleared on payment of excise duty. Sulphuric Acid (H2SO4), a by-product, was cleared without payment of duty as per Notfn. 6/97 dt. 1.3.97. Appellants also produced Oxygen gas (O2) falling under Chapter Heading 28.04 and captively consumed in the manufacture of copper anode and availed exemption notification No. 67/95. The adjudicating authority in the first order No. 27/03 dt. 12.8.2003 denied Notfn. 67/95 on the Oxygen Gas captively consumed and used in the manufacture of exempted goods viz. Sulphuric Acid but extended exemption benefit under various other notifications and held that oxygen was used in the manufacture of sulphuric acid which in turn was used in the manufacture of fertilizers. The adjudicating authority dropped the proceedings.

3. The appellant challenged the said order only contesting the excisability of the oxygen and the Revenue also challenged the said order against the dropping of demand. The Tribunal in the Final Order No. 153, 154/07 dt. 20.2.2007 remanded the case to the Commissioner with direction to examine the applicability of the exemption notification and also to examine whether the oxygen manufactured in the oxygen plant of the assessee was indeed marketable so as to be exigible to levy of excise. The adjudicating authority in his de novo order confirmed the demand of Rs. 5,20,96,576/- towards excise duty on the quantity of oxygen consumed captively in the manufacture of sulphuric acid and removed without payment of duty during the period July 1997 to Feb 2002 along with interest and imposed equal penalty under Section 11AC. He also confirmed an amount of Rs. 13,21,48,708/- towards excise duty on the oxygen consumed captively in the manufacture of sulphuric acid and cleared without payment of duty during the period March 2002 to June 2007 and also imposed equivalent penalty under Rule 25 of CER 2002 read with Rule 173Q of erstwhile CER 1944. Hence the present appeal.

4. Learned Advocate appeared on 30.10.2015 and explained the process of manufacture of Copper Anode from copper concentrate and also submits that for manufacture of copper anode, they require oxygen and they produce oxygen gas in their own plant and captively consumed in the manufacture of copper anode. He submits that while manufacturing copper anode, various waste gases viz. i.e. Sulphur Dioxide (SO2), Iron Oxide emerges out on account of removal of impurities contained in the copper concentrate. In terms of the Environment (Protection) Rules, 1986, Sulphur Dioxide and Iron Oxide cannot be let off in the atmosphere and they have to concert the Sulphur Dioxide into sulphur Trioxide (SO3) which is again finally converted into Sulphuric Acid (H2SO4). He further submits that oxygen produced in the plant are used exclusively in the manufacture of copper anode and not used in the manufacture of sulphuric acid at any stage. Therefore, he submits that oxygen produced in their plant is not an essential input used in the manufacture of exempted product viz. sulphuric acid.

4.1 Ld. Advocate explained the process of conversion of sulphur-di-oxide (SO2) to sulphur-tri-oxide (SO3) and then to H2SO4, additional oxygen element which is present in H2SO4 is absorbed from the oxygen present in the water (H2O). He drew our attention to their reply to SCN (Page-50 of PB) at paras 3 to 8 where they explained that waste gas sulphuric acid which emerges in the process of purification of copper concentrate is converted into H2SO4 by taking atmospheric oxygen and Oxygen present in the water and not from the Oxygen produced from their plant. He further submits that as per Notfn. 67/95-CE dt. 16.3.95, oxygen produced is captively consumed in the manufacture of excisable goods. He submits that clause (ii) of the notification read with provision (vi) of Notfn. No. 67/95 is applicable to their case. The provision (vi) of the Notification stipulates that the manufacturer of dutiable and exempted final products discharge obligation under Rule 6 of CCR 2001 and he submits that they have discharged the obligation under rule 6 (6) of CCR. They are covered under sub-rule (2) of Rule 6 of CCR 2002 that dutiable goods viz. oxygen manufactured in their plant is used in the manufacture of dutiable final product and not used as an input in the manufacture of any exempted product i.e. Sulphuric Acid. Therefore, they are eligible to benefit of exemption Notfn. 67/95.

4.2 He relied Supreme Court's decision in the case of UOI v. Hindustan Zinc Ltd. 2014 (303) ELT 321 (SC). He drew our attention to paras 2, 16, 20, 25 and 26 of the said judgement. He submits that Hon'ble Supreme Court on an identical issue, had clearly held that SO2 emerging as inevitable technological necessity is converted into H2SO4 as non-polluting measure, and sold to fertilizer manufacturers. He submits that Apex Court in the above judgement held that sulphuric acid was only a by-product and the conversion of SO2 to H2SO4 do not elevate sulphuric acid to a status of final product. There is no necessity to maintain separate records for zinc concentrate used in the production of H2SO4. He submits that the apex court decision is in relation to requirements of Rule 57CC and it is squarely applicable to the facts of this case. During manufacture of copper anode from the copper concentrate, SO2 produced as a waste gas which is again converted into sulphuric acid. Therefore, sulphuric acid is not a final product but it is only a by-product.

4.3 He further referred to para-13 of the first OIO dt. 12.8.2003 on the marketability. He submits that oxygen produced in their plant is not marketed and it is used only for purification of copper concentrate. In order to make oxygen marketable, it requires further purification and further infrastructure which they do not have in their existing unit and since they have not intended for sale of oxygen, there is no question of clearance of oxygen. He also relied on the following decisions:--

"(1) Ambuja Cement Ltd. v. CCE Supreme Court judgement dt. 21.8.2015

(2) Ultratech Cements Ltd. & Others v. CCE 2015-TIOL-2110-CESTAT-MAD

(3) Hindustan Zinc Ltd. v. CCE 2005 (181) ELT 176 (SC)"

5. On the other hand, Ld. A.R. reiterated the findings of OIO and explained the marketability of oxygen. He submits that oxygen is used in the manufacture of copper concentrate by which SO2 emerges which in turn is converted into sulphuric acid. Since Sulphuric acid is cleared without payment of duty under exemption Notfn. 67/95, appellants are not eligible for Notfn. 67/95 for availing exemption for 'oxygen' used in the manufacture of final goods.

6. Regarding Hon'ble Supreme Court decision relied by the appellant in the case of UOI v. Hindustan Zinc Ltd. (supra), she submits that said Supreme Court order relates to erstwhile Rule 57CC and not on the captive consumption under Notfn. 67/95. She submits that since sulphuric acid is an exempted final product, the adjudicating authority has correctly demanded duty on the oxygen captively used in the manufacture of sulphuric acid through the process of conversion of SO2 to SO3 and converted to H2SO4. She further submits that appellants have set up independent plant for manufacture of sulphuric acid. She submits that in this case the Sulphuric acid was cleared to fertilizer units. She also relied the same case law in the case of UOI v. Hindustan Zinc Ltd. relied by appellant to contend that the Hon'ble Supreme Court has held that sulphuric acid is an exempted product.

7. After careful consideration of the submissions of both sides and on perusal of records, we find the short issue involved in the appeal relates to denial of benefit of captive consumption Notification No. 67/95-CE dt. 16-3-1995 on the oxygen gas produced and captively consumed in the manufacture of Copper Anode. The adjudicating authority in his de novo order denied the exemption only on the ground that Sulphuric Acid (H2SO4) is a final product cleared at 'Nil' rate and held that since oxygen is captively used in the manufacture of Copper Anode (dutiable) and Sulphuric Acid (exempted) they are not eligible for Notfn. 67/95. We find that H2SO4 was cleared at Nil rate the fertilizer plant claiming exemption under Sl. No. 28 of Notification No. 6/97 : MANU/EXCT/0004/1997 dt. 1.3.97.

8. On careful study of manufacturing process as explained in the proceedings, we find that the appellants have set up a plant only for manufacture of final product copper anode from the imported copper concentrate. It is seen that Oxygen is one of the essential inputs for conversion of Copper Concentrate into Copper Anode and it is used in the furnace and in the smelter converter to remove impurities contained in the copper concentrate. In the process of purification, sulphur dioxide SO2 emerges out as waste gas. However, due to stringent conditions imposed by the Environment Ministry, the sulphur dioxide cannot be let off by the industries. As per Environment (Protection) Rules, 1986, it is a mandatory requirement of appellant unit to process the harmful gases without letting out in the atmosphere. Further, as evident from their reply to SCN before adjudicating authority that oxygen is so generated in the plant is captively consumed only in the process of conversion of copper concentrate to copper anode and not in the manufacture of Sulphuric Acid.

9. During the process of conversion of SO2 to SO3, one more element of oxygen is added and this additional element of oxygen is not taken from the oxygen plant but from the atmosphere. The Sulphur Dioxide (SO2) combines with atmospheric oxygen and gets converted into Sulphur Trioxide (SO3). This Sulphur Trioxide is absorbed in Sulphuric Acid to form Oleum. This super-saturated Oleum is dissolved in water to produce 98% pure Sulphuric Acid (H2SO4) i.e. the fourth element of oxygen is derived from water. This fact is easily verifiable from the manufacturing process. It is evident that oxygen produced in their plant is captively consumed and used only in the copper concentrate for purification and not diverted elsewhere for process of conversion of SO2 or SO3 or to Sulphuric Acid. Therefore, on merit itself it is established that oxygen produced captively is not used as an input in the manufacture of Sulphuric Acid and appellant is eligible for Notfn. 67/95 on oxygen on merit.

10. Further, it is pertinent to state that so long as Oxygen produced in their plant is used captively in the manufacture of final product (i.e.) copper concentrate and cleared on payment of duty, the appellants are rightly eligible for exemption under Notfn. 67/95 for oxygen. The case of the department is that appellant used the inputs i.e. oxygen in the manufacture of Sulphuric Acid which is cleared at Nil rate under exemption notification. As discussed in the preceding paragraphs and it is established from the chemical process and from manufacturing process there is no justification for the revenue's view that O2 is used in the manufacture of H2SO4.. It is evident that oxygen so produced in their captive plant is used only in the purification of copper concentrate in the manufacture of copper anode. Therefore, appellants are eligible for captive consumption of Oxygen under Notification No. 67/95 as the final product copper anode is excisable which is cleared on payment of duty.

11. Notwithstanding above, we find that Hon'ble Supreme Court in the case of UOI v. Hindustan Zinc Ltd. (supra) clearly held that what is manufactured in the final product is only copper only. In that case, Sulphur Dioxide was converted into sulphuric acid which cannot be considered as a final product but it is only a by-product. In view of the above facts, appellants are eligible for Modvat credit. The relevant paragraph of the apex court judgement is reproduced as under:--

"2. At the outset, the controversy involved may be reflected by pointing out that the questions for consideration are as to the entitlement of the respondents/assessees to Modvat/Cenvat credit for the use of inputs in the manufacture of final products which are exempt or subject to nil rate of duty and the requirement of the assessee to maintain separate accounts with respect to inputs used in dutiable goods as well as exempted goods and the liability arising on the failure of the assessee to maintain such separate accounts. In Civil Appeal Nos. 8621-8630 of 2010, we are concerned with sulphuric acid. In Civil Appeal No. 8631 of 2010, it is caustic soda flakes and trichloro ethylene. In Civil Appeal No. 2337 of 2011, the product is again sulphuric acid and in the case of Civil Appeal No. 5322 of 2010 and the other connected matter of M/s. Rallis India Ltd., it is Phosphoryl A and Phosphoryl B. The issue is as to whether the assessees (respondents) are entitled to Modvat/Cenvat credit on inputs used in the manufacture of the aforementioned exempted (or subject to NIL rate of duty) final products.

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16. Before we advert to the interpretations of the aforesaid provisions and to discuss the argument of the Union of India as to whether literal interpretation is to be given to Rule 57CC, it would be necessary to understand the properties of sulphuric acid. From what is explained above including the use of sulphuric acid for the production of zinc, it becomes apparent that sulphuric acid is indeed a by-product. In fact, it is so treated by the respondents in their balance sheet as well as various other documents which were filed by the respondents in the courts below. It is also a common case of the parties that Hindustan Zinc Limited and Birla Copper were established to produce zinc and copper respectively and not for the production of sulphuric acid. It was argued by the learned Counsel for the respondents, which could not be disputed by the learned Solicitor General, that emergence of sulphur dioxide in the calcination process of concentrated ore is a technological necessity and then conversion of the same into sulphuric acid as a non-polluting measure cannot elevate the sulphuric acid to the status of final product. Technologically, commercially and in common parlance, sulphuric acid is treated as a by-product in extraction of non-ferrous metals by companies not only in India but all over the world. That is the reason why the department accepted the position before the Tribunal that sulphuric acid is a by-product.

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20. Let us now examine the position contained in Rule 57CC on the touchstone of the aforesaid position. No doubt, Rule 57CC requires an assessee to maintain separate records for inputs which are used in the manufacture of two or more final products one of which is dutiable and the other is non-dutiable. In that event, Rule 57CC will apply. For example, a tyre manufacturer manufactures different kinds of tyres, one or more of which were exempt like tyre used in animal carts and cycle tyre, where car tyres and truck tyres attract excise duty. The rubber, the accelerators, the retarders, the fillers, sulphur, vulcanising agents which are used in production of tyres are indeed common to both dutiable and exempt tyres. Such assessees are mandated to maintain separate records to avoid the duty demand of 8% on exempted tyres. But when we find that in the case of the respondents, it is not as though some quantity of zinc ore concentrate has gone into the production of sulphuric acid, applicability of Rule 57CC can be attracted. As pointed out above, the entire quantity of zinc has indeed been used in the production of zinc and no part can be traced in the sulphuric acid. It is for this reason, the respondents maintained the inventory of zinc concentrate for the production of zinc and we agree with the submission of the respondents that there was no necessity and indeed it is impossible, to maintain separate records for zinc concentrate used in the production of sulphuric acid. We, therefore, agree with the High Court that the requirements of 57CC were fully met in the way in which the Respondent was maintaining records and inventory and the mischief of recovery of 8% under Rule 57CC on exempted sulphuric acid is not attracted.

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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. 2337 of 2011) the Tribunal has decided the matter following the judgment in the case of Swadeshi Limited (supra). In that case, Ethylene Glycol was reacted with DMT to produce polyester and ethanol. Methanol was not excisable 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 ethylene glycol was used in the production of methanol and proportionate credit taken on ethylene glycol was to be reversed. This Court ruled that the emergence of methanol was a technological necessity and no part of ethylene glycol could be said to have been used in production of methanol and indeed it was held that the total quantity of ethylene glycol was used for the production of polyester. The fact in all these three appeals appear to be identical to the facts and the law laid down in Swadeshi Polytex (supra). Therefore, this judgment is squarely applicable.

26. Furthermore, the provisions of Rule 57CC cannot be read in isolation. In order to understand the scheme of Modvat credit contained in this Rule, a combined reading of Rules 57A, 57B and 57D along with Rule 57CC becomes inevitable. We have already reproduced Rule 57D above. It can be easily discerned from a combined reading of the aforesaid provisions that the terms used are inputs, final products, by-product, waste products, etc. We are of the opinion that these terms have been used taking into account commercial reality in trade. In that context when we scan through Rule 57CC, reference to final product being manufactured with the same common inputs becomes understandable. This Rule did not talk about emergence of final product and a by-product and still said that Rule 57CC will apply. The appellant seeks to apply Rule 57CC when Rule 57D does not talk about application of Rule 57CC to final product and by-product when the by-product emerged as a technological necessity. Accepting the argument of the appellant would amount to equating by-product and final product thereby obliterating the difference though recognised by the legislation itself. Significantly this interpretation by the Tribunal in Sterlite (supra) was not appealed against by the department."

The Hon'ble apex court is clearly applicable to the facts of the case as in the present case the sulphuric acid is cleared as by-product as explained in the preceding paragraphs and the final product is only copper anode and not sulphuric acid. The waste gas which emerges out of process of purification of copper concentrate in Sulphur Dioxide which is further converted into Sulphur Trioxide which is absorbed in Sulphuric Acid to form Oleum. This Oleum is dissolved in water to get purest form of Sulphuric Acid. It is pertinent to state that under the Environment (Protection) Rules, 1986 vide sub-rule (2) of Schedule I and as per Sl. No. 21 of the Schedule I of the Environment Rules, it is mandatory for the appellant to prevent emission of oxides of sulphur in Smelter and Converter of copper and it stipulates that waste gases are to be utilized in the manufacture of Sulphuric Acid so as to prevent emission of Sulphur Dioxide. The apex court decision cited supra dealt with the identical issue of conversion of Sulphur Dioxide and Sulphur Trioxide into sulphuric acid and held it is only a by-product and not final product.

12. Further, we find this Tribunal Bench in an identical issue of captive consumption notification 67/95 in the case of Ultratech Cement and Others v. CCE 2015 TIOL-2110-CESTAT-MAD had allowed the benefit of notification No. 67/95-CE.

13. Further, we find that as per Notfn. 67/95, both input oxygen and the final products are rightly covered in the Table of the Notification. Proviso (vi) of the notification stipulates that this notification is applicable provided appellant complied with Rule (6) of CCR 2001. The only condition is that Sub-Rule (2) of Rule 6 of CCR is required to be complied with. In the present case, as per sub-rule (2), appellant manufactured oxygen used in the manufacture of excisable product and they had no obligation to maintain separate accounts for oxygen used in the manufacture of Sulphuric Acid. It is established that appellant did not use oxygen produced in the manufacture of Sulphuric Acid. Accordingly, conditions of Notfn. 67/95 are complied. By respectfully following the Apex Court decision in the case of UOI v. Hindustan Zinc Ltd. (supra), we hold that appellants are eligible for benefit of Notfn. 67/95 and the duty demand on the quantity of oxygen so used in the manufacture of sulphuric acid, is liable to be set aside. Consequently, no penalty survives and it is set aside. Impugned order is set aside and the appeal is allowed.