Central Excise - Manufacture of dutiable and exempted final products - 6% payment/separate accounts - not applicable for exempted by-products - SC
AS per Rule 6 of the CENVAT Credit Rules, a manufacturer who avails of CENVAT credit in respect of any inputs and manufactures such final products which are chargeable to duty as well as exempted goods, 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. If he is not able to maintain separate accounts, he should pay an amount equal to six percent of the value of the exempted goods.
What are final products? Do they include by-products? For example in the manufacture of zinc, sulphuric acid is an unavoidable by product. The zinc factory's purpose is to manufacture zinc - not sulphuric acid. Now if this zinc is exempted, should the assessee who has taken credit on inputs pay six percent while clearing exempted sulphuric acid?
This was exactly the question before the Supreme Court in a judgement delivered yesterday.
The Supreme Court observed,
"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. 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 Counsel for the respondents, which could not be disputed by the 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.
In these circumstances the position taken now by the appellant that sulphuric acid cannot be treated as a by-product cannot be countenanced. It was submitted that the extraction of zinc from the ore concentrate will inevitably result in the emergence of sulphur dioxide as a technological necessity. It is not as though the Respondents can use lesser quantity of zinc concentrate only to produce the metal and not produce sulphur dioxide. In other words, a given quantity of zinc concentrate will result in emergence of zinc sulphide and sulphur dioxide according to the chemical formula on which respondents have no control.
On these facts this court is inclined to accept the version of the respondents that the ore concentrate is completely consumed in the extraction of zinc and no part of the metal is forming part of sulphuric acid."
On the requirement of payment of 6% of the value, the Supreme Court observed,
"No doubt, Rule 57CC (present Rule 6) 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 57 CC 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 assesses 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 57 CC can be attracted. As pointed out, 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."
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