Full Judgment
2. Shri A.R. Madhav Rao, learned Advocate, submitted that the appellants manufacture zinc/lead in their Smelting Unit; that for the manufacture of zinc and lead, they use LDO in the Smelting operations; that by the process of roasting the Ore concentrates, Sulfer Di-oxide one of the impurities is generated; that this Sulfur di-oxide cannot be vented in the air due to its hazardous nature and Pollution control norms; that consequently, Sulfure Di-oxide is converted to Sulfuric Acid in the Sulfuric Acid Plant; that the Commissioner, under the impugned order, has confirmed the demand and imposed a penalty on the ground that LDO has been used in the manufacture of exempted product and that when Sulfuric Acid is removed without payment of duty, credit on inputs proportionate to its use in the manufacture of Sulfuric Acid, should be reversed. The learned Advocate, further, submitted that admittedly the Sulfuric Acid is only a by-product and there are number of decisions wherein it has been held that credit cannot be denied when the inputs are used in the manufacture of final product and by-products are generated. He has relied upon the following decisions : i) Gas Authority of India Vs. CCE, Kanpur - Final Order No. A/402/2003 NB(C) dated 02.07.2003;Arti Drugs Ltd. vs CCE, 2.2 He, Finally, submitted that it has held by the Supreme Court in the case of IFFCO vs. CCE, 1996 (86) ELT 177(SC) that if an input is used for Pulluation Control, it is used in the manufacture of the final product and the credit cannot be denied.
3. Countering the arguments, Sh. Kumar Santosh, Learned SDR, reiterated the findings as contained in the impugned order and emphasised that Sulfuric Acid is not being generated as a by-product as it is being manufactured in a separate section known as Sulfuric Acid Plant; that separate manufacturing processes are undertaken by the appellants for manufacturing the sulfuric Acid and as such it is a separate product; that as the Sulfuric Acid is exempted from payment of duty, the provisions of Rule 57c, which provides that the MODVAT Credit will not be available if the inputs are used in or in relation to the product will be attracted. he relied upon the decision in the case of Commissioner of Sales-tax vs. Bharat Petroleum Corporation Ltd., 1995 (77) ELT 790 (SC), wherein it has been held by the Supreme Court 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 its manufactured but also the subsidiary products. Reliance has also been placed on the decision in the case of CCE vs India Gelatine And Chemical, 1996 (88) ELT 425 (T) wherein it has been held that frequency and regular intervals at which sludge and dust was cleared does suggest that there products were not mere waste but were subsidiary products turned out regularly and continuously during the course of manufacture and were sold regularly.
He, therefore, contended that the MODVAT Credit is not allowable on the quantity of LDO which has gone into the manufacture of exempted product, namely, Sulfuric Acid.
4. We have considered the submissions of both the sides. It has not been disputed by the Revenue that LDO, in respect of which MODVAT Credit has been availed of by the appellants, is used in the Smelting operations undertaken by them for manufacture of their final products, i.e., zinc and lead and Sultur Di-oxide is generated as a result of Smelting operation. The generation of Sulfur Di-oxide gas is nothing but a by product in the process of manufacture of zinc/lead. Rule 57 D(1) of the Central Excise Rules, at the relevant time, provided that the credit of specified duty "shall not be denied or varied on the ground that part of inputs is contained in any waste, refuse, or by-product, or that the inputs have become waste during the course of manufacture of the final product, whether or not such waste or refuse or by-product is exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty or is to specified as a final product under Rules 57A." It is, thus, apparent from the provisions of Rule 57D (1) of the Rules, that credit shall not be denied on the ground that part of the inputs is contained in a by-product. It is also not disputed that by-product in the present matter, namely, Sulfur Di-oxide gas is taken to Sulfuric Acid Plant for converting the same into Sulfuric Acid. We agree with the learned SDR that Sulfuric Acid has been obtained by the appellants as a conscious act. However, it cannot be claimed by the Revenue that any part of the inputs i.e. LDO has gone into manufacture of Sulfuric Acid. for the purpose of applying the provisions of Rule 57C of the Central Excise Rules, 1944, it is pre-requisite that the inputs are used in the manufacture of products, which are exempted from the whole of the duty of Excise or is chargeable to nil rate of duty. The mere fact of using Sulfur Di-oxide for making Sulfuric acid will not tantamount to using the modvatable inputs in the manufacture of exempted products i.e. Sulfuric Acid. This was the view expressed by the Tribunal in the case of Hi-tech Carbon (supra) where the appellants were availing MODVAT Credit of the duty in respect of carbon back feed stock for the manufacture of carbon black; that during the process of manufacture, off gages were generated. these off gases were used by the appellants to generate steam. The Tribunal, after relying upon the decision in the case of Arti Drugs ltd. (supra) has held that provisions of Rule 5CC of the Central Excise Rules, 1944, shall not be applicable to the steam. The ratio of the decision in the case of Hi-Tech Carbon (Supra), is squarely applicable to the facts of the present matter. The decisions relied upon by the learned SDR do not advance the case of the Revenue as far as the present issue is involved. In both these cases, what has been held is that the subsidiary by-products, which are regularly and contino7usly obtained and sold, are also the result of manufacture. The issue in the present matter is not whether the process undertaken by the appellants to get Sulfuric Acid amounts to manufacture or not. The issue involved is whether the MODVAT Credit of the duty paid on LDO is to be denied proportionately as the Sulfuric Acid, which as already been obtained by the appellants is exempted from payment of duty. it has been observed by the Tribunal in the case of Arti Drugs ltd. That "by insertion of Rule 57 CC, there was no intention to eliminate the benefit available under Rule 57D (1) to a by-product. The marketability or otherwise of by -product is not really an issue. We, therefore, hold that the MODVAT Credit is not deniable to the appellants. Accordingly, we set aside the impugned order and allow the appeal.