Custom, Excise & Service Tax Tribunal
M/S Narmada Gelatines Limited vs Cce, Bhopal on 25 July, 2008
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL, NEW DELHI
PRINCIPAL BENCH, COURT NO. III
Excise Appeal No. 5977 of 2004
[Arising out of Order-in-Original No.41-46/COMMR/CEX/2004 dated 30.9.2004 passed by Commissioner of Central Excise, Bhopal]
Date of Hearings : 24/ 25.7.2008
Date of decision: .08.2008
For approval and signature:
Hon'ble Mr. M. Veeraiyan, Member (Technical)
Hon'ble Mr. D.N. Panda, Member (Judicial)
1 Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
2 Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3 Whether Their Lordships wish to see the fair copy of the Order?
4 Whether Order is to be circulated to the Departmental authorities?
M/s Narmada Gelatines Limited Appellant
Vs.
CCE, Bhopal Respondent
Appearance:
Shri V. Laxmikumaran, Advocate for the Appellant.
Shri V.K. Agrawal, DR for the Respondent CORAM: Hon'ble Mr. M. Veeraiyan, Member (Technical) Hon'ble Mr. D.N. Panda, Member (Judicial) ORDER NO . ________________________ Per M. Veeraiyan (for the Bench):
This is an appeal against the order of the Commissioner No.41-46/COMMR/CEX/2004 dated 30.9.2004.
2. Heard both sides.
3. The relevant facts, in brief, are as follows:-
a) The appellant is engaged in the manufacture of gelatine both industrial and edible grade falling 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 liquor is treated with milk of lime (calcium hydro-oxide) resulting in animal feed namely Di-Calcium Phosphate(DCP) which on further purification and enrichment results in production of animal feed supplement known as EDCP.
c) The product gelatine is cleared on payment of duty and the products DCP and EDCP are cleared without payment of duty as the same are exempted.
d) Six show cause notices covering the period April 2000 to October 2003 were issued proposing recovery of 8% of sale price under Rule 57CC of the Central Excise Rules 1944 ( later under Rule 6 of Cenvat Credit Rules) on Di-calcium phosphate and enriched Di-calcium phosphate, on the ground that the appellant has used hydrochloric acid as a common input in the manufacture of the dutiable gelatine and the exempted DCP/EDCP but has not maintained separate accounts in respect of hydrochloric acid meant for manufacture of exempted products.
e) The original authority by his order dated 01.10.2004 confirmed the demand of duty amounting to Rs. 2,35,87,876/-; he also ordered recovery of interest on the said demand. He also imposed a penalty of Rs. 5 lakh under Rule 173Q of Central Excise Rules and Rule 13 of Cenvat Credit Rules.
4. Learned Advocate made the following submissions.
4.1 The appellant is into the manufacture of gelatine; the entire quantity of hydrochloric acid is used in the process of acidulation which results in emergence of ossein and hazardous mother liquor. The emergence of mother liquor is incidental to the production of Ossein which is processed further to get gelatine, the final product which is dutiable. The hazardous mother liquor can not be drained out as such and is required to be neutralised in view of regulation of Pollution Control Board. This is done by treating the mother liquor with milk of lime leading to emergence of by products DCP and EDCP.
4.2 The emergence of DCP and EDCP cannot be construed to mean that a part of the inputs has been used to manufacture these exempted goods. 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.
4.3. It is not a case where the same input is partly used for dutiable products and partly used for exempt products. Only in such a situation, maintenance of separate accounts is envisaged. It is not possible 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. Vs. CCE reported in 1989 (44) ELT 794 (SC) wherein it has been held that the entire inputs, ethylene glycol, has been held to have been used in the manufacture of polyester fibre even though non dutiable methanol emerged as a by product. The said decision was interpreting the applicability of Notification No. 201/79-CE dated 4.6.79 prior to amendment of the said notification from 11.04.81. The Honble 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 EDCP have to be considered only as a by-products and hence Rule 57AD and Rule 6 are not applicable. He also submits that for the period upto March 2000 the demands were dropped by the Commissioner (Appeals) and the Department has not filed any appeal against the said order. The Department cannot take divergent views for different period when the issue has attained finality.
4.7 He also relies on Boards instructions issued in File No. B4/7/2000-TRU dated 3.4.2000 clarifying that the emergence of waste, by-product etc cannot be a ground for denial of the credit of the duty paid on the inputs.
4.8. He submits that DCP, EDCP are only by-products as held by the Honble High Court of Madhya Pradesh in their own case though in the context of levy of sales tax.
4.9. He submits that decision of the larger bench of the Tribunal in the case Rallies India Ltd., vs. CCE, Salem reported in 2007 (208) ELT 25 (Tri.-LB) is not applicable to their case.
5.1. Learned DR submits that the appellant are manufacturing both dutiable product gelatine and non-dutiable DCP and EDCP. They are using hydrochloric acid which is a common input; they have not maintained separate account for hydrochloric acid meant for these exempted products. Therefore, they are bound to pay 8% of the value of exempted products cleared by them.
5.2. Learned DR relies on the decision of the larger bench of the Tribunal in the case of Rallies India Ltd.,(supra). He draws our attention to para 2 of the said decision wherein the facts of that case have been described and claims that the facts are identical to those of the present case. According to him, the Tribunal has held that, as long as the excisable product cleared from the assessees factory were either exempted or attracted nil rate of duty, the provision of rule 57CC would come into play and that it was immaterial as to whether the exempted final product was manufactured intentionally or that it was an unintended by-product. 6. We have carefully considered the submissions made from both sides. The relevant portion of the findings of the Commissioner is worth reproducing.
10. It is seen from the records that the assessee are the manufacturers of gelatine falling under chapter heading 3503.00 of the tariff. Gelatine is produced from Animal bones by acidulation process. For acidulation of crushed bones hydrochloric acid 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. It was, therefore, neutralised by adding lime water (Milk of Lime). By treatment of MCP with lime water, Di-Calcium Phosphate (DCP) was obtained. During conversion of MCP to DCP, Hydrochloric acid was not used at any stage. The another product Enriched Di Calcium Phosphate (EDCP) was manufactured from DCP by further enriching it with various other ingredients like lime stone powder, Magnesium Sulphate, Cobalt, Potassium Iodide etc. on which no cenvat credit was availed.
14. In view of the above, it is clear that after acidulation of bones with Hydrochloric acid, two intermediate products emerge viz. Ossein and MCP. Further processing of Ossein gives rise to gelatine while further processing of MCP gives rise to DCP and EDCP. It is not disputed that the spent acid containing MCP was generated as a result of acidulation of animal bones during the manufacturing of gelatine, the final product of the assessee. It is also an admitted fact that DCP and EDCP were manufactured by the assessee by further processing of MCP.
15. Their by-product in fact is MCP while DCP & EDCP were manufactured by them by further processing of MCP as a conscious act and they were not generated automatically/incidentally. Secondly, even if DCP & EDCP are considered to be as their by-products, there is no such provision in the cenvat rules permitting clearances of exempted goods, manufactured by using common cenvatable inputs, without payment of an amount equal to 8% of their price charged excluding the taxes.. 7.1 Commissioner has clearly held that entire hydrochloric acid was used by the assesse at the very initial stage of manufacture i.e. during demineralisation of crushed bones. He has held that the process of demineralisation led to emergence of two intermediate products namely ossein and mother liquor.
7.2. With out the demineralisation of crushed bones, neither the dutiable products nor the exempted products could have been manufactured. It is not a case of some portion of hydrochloric acid is being exclusively used in relation to manufacture of dutiable products and some portion of hydrochloric acid being used for manufacture of exempted products. Therefore, it can not be denied that the entire amount of hydrochloric acid has been used in relation to manufacture of gelatine; it is not possible to use lesser quantity of hydrochloric acid to obtain the same 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 contended by the Department that by some other process gelatine could be manufactured without use of hydrochloric acid. May be, it is possible. In respect of such manufacturing process, hydrochloric acid will not be an input. The excise law does not envisage that a manufacturer has to choose a particular manufacturing process. In the manufacturing process adopted by the appellant, use of hydrochloric acid as an input can not be disputed and is not being disputed.
8.1. The decision in the case of Rallies India Ltd., has been taken on appreciation of certain facts. In the said case, it has been held that even according to the appellant, HCL is not a necessary and fundamental input for the manufacture of gelatine, 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. It has also gone on the understanding that the Rule 57CC held did not make any distinction between exempt final product or exempt by-product that as long as two final products emerging out of use of common use of inputs were excisable and one of them was exempted the provision of rule 57CC would apply.
8.2. The Ld advocate submitted that decision of the Honble Supreme Court in the case of Swadeshi Polytex Limited (supra) was cited before the larger bench but the same has not been referred or relied up on. With out going into the submission as to whether the said judgment was cited or not, it suffices to say that the decision of the Tribunal in the case of Rallies India has not taken into account the decision in the case of Swadeshi Polytex Limited (supra). Ld Advocate submits the decision of the Tribunal in the case of Rallies India has been challenged in the High court and submitted copies of the petition. However, he fairly conceded that there is no stay of said order.
8.3. He also submitted that the said decision of the Honble Supreme Court in the case of Swadeshi Polytex Limited (supra) is to the effect that even though some part of the input may be contained in waste, refuse or by-product which is chargeable to Nil rate of duty, the credit of duty paid on the inputs can not be denied and that 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 can not 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.
(Pronounced in the Court on ___.08.2008) [M. Veeraiyan] Member [Technical] [D.N. Panda] Member [Judicial] [Pant]